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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-26649
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NEXTEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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WASHINGTON 91-167-1412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1191 SECOND AVENUE, SUITE 1600 98101
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (206) 749-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated herein by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [X]
The registrant's outstanding common equity securities are held entirely by
a wholly owned subsidiary of Nextel Communications, Inc. Accordingly, no
aggregate market value of the registrant's common equity held by non-affiliates
is available.
On March 15, 1998, the number of shares outstanding of the registrant's
Common Stock, no par value, was 36,500,000.
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NEXTEL INTERNATIONAL, INC.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Unless the context requires otherwise, the terms "Company" and "Nextel
International" refer to Nextel International, Inc. (formerly McCaw
International, Ltd.) and the Operating Companies (as defined below) and all
references herein to "Nextel Brazil" refer to McCaw International (Brazil), Ltd.
and its subsidiaries and affiliates. The Company is an indirect wholly owned
subsidiary of Nextel Communications, Inc. ("Nextel Communications"). Except as
otherwise indicated, all dollar amounts are expressed in U.S. dollars and
references to "dollars" and "$" are to U.S. dollars. All consolidated historical
financial statements contained herein are prepared in accordance with U.S.
generally accepted accounting principles ("U.S. GAAP") and are presented in U.S.
dollars.
Unless indicated otherwise, the information contained herein (other than
the financial statements included herein) gives effect to the following
transactions: (i) the issuance of 82.54 shares of the Company's Series A
Redeemable Exchangeable Preferred Stock, par value $10.00 per share (the "Series
A Preferred Stock"), to a wholly owned subsidiary of Nextel Communications for
consideration of $8,254,000; (ii) the transfer to the Company by a wholly owned
subsidiary of Nextel Communications of 6,777,778 Class D Common Shares of
Clearnet Communications Inc. in exchange for 906.32 shares of Series A Preferred
Stock (the "Clearnet Transaction"); (iii) the acquisition by the Company of the
remaining 50% equity interest in the holding company for Nextel Argentina S.R.L.
("Nextel Argentina," formerly McCaw Argentina S.A.) on January 30, 1998 for $46
million (the "Argentina Acquisition"); and (iv) the acquisition by the Company
of a 70.1% equity interest in Valorcom S.A., a Peruvian company ("Nextel Peru"),
on January 29, 1998 for $27.9 million, of which approximately $7.0 million was
paid on such date (the "Peru Acquisition"). As a result of these transactions,
the Company currently owns 100% of the outstanding capital stock of Nextel
Argentina, 70.1% of the outstanding capital stock of Nextel Peru and a 19.4%
equity interest in Clearnet. See "-- Post Fiscal Year-End Transactions and
Developments."
GENERAL
Nextel International provides wireless communications services in five of
the largest cities in Latin America and two of the largest cities in Asia. As of
December 31, 1997, the Company's markets covered approximately 248 million
people ("POPs"), approximately 131 million of which were in Latin America.
Nextel International is the largest specialized mobile radio ("SMR") service
provider in Brazil and Mexico, and holds the largest SMR channel position in
Argentina. The Company's strategy is focused on using its leading analog
dispatch or SMR channel positions in its principal markets, together with Nextel
Communications' experience and supplier relationships, to upgrade its services
from analog dispatch to digital enhanced specialized mobile radio ("ESMR")
services. The Company intends to use digital "iDEN(TM)" (integrated Digital
Enhanced Network) technology developed by Motorola, Inc. ("Motorola") to provide
its ESMR services. The Company currently plans to launch ESMR commercial service
in Sao Paulo during the first half of 1998, Buenos Aires and Rio de Janeiro
during the second quarter of 1998 and Mexico City and Manila during the third
quarter of 1998. The timing of the Company's currently planned launch schedule
depends on a number of factors, some of which are beyond the Company's control.
See "-- The Company's Operations and Investments." The Company's upgrade to
digital networks will allow it to increase capacity significantly and to offer,
in a single digital subscriber unit, additional services and advanced features,
such as direct connect (group calling and instant conferencing), telephone
interconnect and text messaging services.
The Company owns majority controlling interests in wireless communications
services companies in Brazil, Mexico, Argentina and Peru and owns an equity
interest and actively participates in the management of a wireless
communications services company in the Philippines. In addition, the Company
owns a 19.4% equity interest in Clearnet, a Canadian wireless communications
services company, and has a contractual right
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through its Chinese joint venture to receive 12.1% of the profits generated by a
Global System for Mobile communications ("GSM") network in Shanghai, China (the
"Shanghai GSM System"). The wireless communications services companies that the
Company owns or has interests in and the right to receive profits in the
Shanghai GSM System are referred to herein as the "Operating Companies." The
Company does not actively participate in the management or in formulation of the
business plans or policies of Clearnet or the Shanghai GSM System and considers
them passive investments. The Operating Companies have wireless communications
networks in some of the largest cities in their respective countries, including
Sao Paulo, Rio de Janeiro, Mexico City, Buenos Aires, and Lima, which are five
of the largest cities in Latin America, and Shanghai and Manila, which are two
of the largest cities in Asia.
The Company holds licenses covering more SMR channels than any other SMR or
ESMR system operator in Brazil and Argentina and believes it is among the
largest SMR (and potential ESMR) service providers, based on its channel
position, in its principal markets in Mexico, Peru and the Philippines.
Nextel International is an indirect wholly owned subsidiary of Nextel
Communications, which is the largest provider of SMR and ESMR services in the
United States. Nextel Communications offers a differentiated, integrated package
of digital wireless communications services primarily to business users. As of
December 31, 1997, Nextel Communications provided service to approximately
1,270,700 digital subscriber units in the United States compared to
approximately 300,300 at December 31, 1996. At December 31, 1997, the Nextel
Communications digital network was operational in areas in which approximately
65% of the total United States population lives or works, providing coverage in
and around 75 of the top 100 metropolitan statistical areas ("MSAs") in the
United States. Nextel Communications' largest shareholders include certain
entities controlled by Craig O. McCaw, the founder of McCaw Cellular
Communications, Inc. (now AT&T Wireless Services, Inc.), and Motorola, which, as
of December 31, 1997, beneficially owned 23.2% and 19.9% of Nextel
Communications, respectively. Nextel Communications files periodic and other
reports with the Securities and Exchange Commission (the "Commission") pursuant
to the requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). More detailed and specific information concerning Nextel
Communications is contained in such Exchange Act reports.
The Company's principal executive office is located at 1191 Second Avenue,
Suite 1600, Seattle, Washington 98101, and its telephone number at that location
is (206) 749-8000.
FISCAL YEAR 1997 TRANSACTIONS AND DEVELOPMENTS
MARCH 1997 OFFERING. On March 6, 1997, the Company completed a private
placement offering (the "March 1997 Offering") of units (the "Units"), each Unit
consisting of one 13% Senior Discount Note due 2007 (collectively, the "March
1997 Notes") and one warrant (collectively, the "Warrants") to purchase 0.38748
shares of the Company's common stock, no par value (the "Common Stock"). The
March 1997 Notes are noncallable for five years and require no interest payments
for the first five years. The Warrants are exercisable at a price of $9.99 per
share and expire in March 2007. The March 1997 Offering generated aggregate net
proceeds to the Company of approximately $482 million. During the period from
the consummation of the March 1997 Offering to December 31, 1997, the Company
used approximately $223.0 million of the net proceeds from the March 1997
Offering to increase its ownership interest in the Operating Companies, to
purchase additional SMR channels, and to fund capital expenditures, operating
losses, working capital and general corporate purposes. Of this $223.0 million,
approximately $90.6 million was spent to increase its equity stake in certain
Operating Companies and to acquire licenses, $124.8 million was used to fund
capital expenditures and $7.6 million was used to fund operating losses, working
capital and general corporate purposes.
ARGENTINA. On May 6, 1997, the Company consummated a joint venture between
Wireless Ventures of Argentina, L.L.C., a Delaware limited liability company
("WVA"), an affiliate of the Telcom Group (as defined below), and the Company.
As a result of such transaction, the Company doubled its spectrum position in
Argentina, became the largest SMR channel holder in Argentina and became the
holder of a nationwide paging business. Immediately following such transaction,
the Company held a 50% equity interest in Nextel
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Argentina. In January 1998, the Company acquired the remaining 50% equity
interest in Nextel Argentina. See "-- Post Fiscal Year-End Transactions and
Developments."
BRAZIL. On January 30, 1997, Nextel Communications acquired an 81% equity
interest in Nextel Brazil for a purchase price of $186.3 million, which was paid
with shares of Nextel Communications Class A Common Stock, and simultaneously
contributed its interest in Nextel Brazil to the Company.
On September 26, 1997, Nextel S.A. (formerly Airlink S.A.), a subsidiary of
Nextel Brazil and the indirect holder of Nextel Brazil's SMR channels and
related operating assets in Brazil, acquired (i) 49% of the capital stock of MCS
Telefonia, Ltda. ("MCS"), an indirect wholly owned subsidiary of Motorola; (ii)
an option to purchase the remaining 51% of the capital stock of MCS; and (iii)
certain assets of MCS (collectively the "MCS Transaction"). The MCS option is
exercisable for $3.2 million upon receipt of certain necessary approvals from
Brazilian regulatory authorities. In connection with the MCS Transaction,
Motorola acquired 5% of the outstanding capital stock of Nextel S.A., which
effectively diluted the Company's ownership in its Brazilian operations to 77%.
MCS owns SMR licenses in 13 of the largest Brazilian cities, including Sao
Paulo, Rio de Janeiro and Belo Horizonte. The MCS Transaction will increase
Nextel S.A.'s SMR channel holdings in each major city in Brazil. See "-- The
Company's Operations and Investments -- Brazil."
In October 1997, Nextel Brazil and Motorola Credit Corp., a subsidiary of
Motorola ("Motorola Credit"), entered into an Equipment Financing Agreement
whereby Motorola Credit agreed to provide up to $125 million in term loans (the
"Brazil Motorola Financing") to Nextel Brazil to be used to acquire
infrastructure equipment and related services from Motorola. The Brazil Motorola
Financing is repayable in semi-annual installments over a period of 42 months
commencing June 30, 2000 and bears interest at an annual rate periodically
determined by the Company of either the LIBOR rate plus 463 basis points or the
prime rate plus 250 basis points. Pursuant to the Brazil Motorola Financing, the
loans are secured by a first priority lien on substantially all of Nextel
Brazil's assets, a pledge of all of the stock of Nextel Brazil and its
subsidiaries, including Nextel S.A., and a guarantee by the Company and Motorola
International (which indirectly holds a 5% equity interest in Nextel S.A.) of
93.9% and 6.1%, respectively, of Nextel Brazil's obligations under such
financing. Additionally, as of December 31, 1997, approximately $35.5 million of
the Company's cash, cash equivalents and marketable securities were restricted
for use as future equity investments in Nextel Brazil and its subsidiaries. See
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
INDONESIA. On August 15, 1997, the Company entered into a preliminary
agreement with PT Gunung Sewu Kencana ("GSK"), a large diversified Indonesian
company, which gives the Company the right, upon receipt of required regulatory
approval, to purchase a 37.5% interest in PT Mitra Kencana Telekomunindo
("MKT"), an Indonesian corporation owned by GSK. MKT holds a provisional license
for 80 SMR channels in Indonesia that can be converted into an operating license
upon satisfaction of certain regulatory approvals. Although the Company believes
that MKT presents it with significant opportunities to expand its SMR network in
Asia, the Company does not intend to make any substantial investment in MKT
until the economic and political conditions in Indonesia, and the economic
conditions in Asia generally, have stabilized. To date, the Company has advanced
$1.5 million to MKT in the form of a loan that is guaranteed by GSK.
SHANGHAI. In December 1997, CCT Technology Services Limited ("CCT"), a
subsidiary of CCT Telecom Holdings Limited, a publicly traded Hong Kong
telecommunications company ("CCT Telecom"), acquired a 51% ownership interest in
Shanghai McCaw Telecommunications Co. Ltd., the Chinese joint venture in which
the company maintained a 60% ownership interest, in exchange for approximately
$46 million of capital contributions, access fees, loans and lease guarantees.
CCT's 51% interest represents the right to receive 20.5% of the profits
generated by the Shanghai GSM System. Immediately thereafter, the joint
venture's name was changed to Shanghai CCT -- McCaw Telecommunications System
Co., Ltd. ("Shanghai CCT McCaw"). The acquisition, which was made directly from
Shanghai CCT McCaw, diluted the Company's ownership interest in Shanghai CCT
McCaw to 30% and the Company's contractual rights to the profits generated by
the Shanghai GSM System to approximately 12.1%. See "-- The Company's Operations
and Investments -- Shanghai, People's Republic of China."
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MEXICO. During 1997, through a series of transactions, the Company
increased its equity interest in Comunicaciones Nextel de Mexico S.A. de C.V.
("Nextel Mexico," formerly Corporacion Mobilcom S.A. de C.V.) from 30.1% to 100%
for consideration equal to approximately $132.2 million. See "-- The Company's
Operations and Investments -- Mexico."
POST FISCAL YEAR-END TRANSACTIONS AND DEVELOPMENTS
ARGENTINA. The Company acquired the remaining 50% equity interest in
Nextel Argentina for $46 million on January 30, 1998. In December 1997, Nextel
Argentina acquired an additional 60 SMR channels in Buenos Aires for $12 million
in a government auction, increasing its SMR spectrum holdings in Buenos Aires to
12 MHz. See "-- The Company's Operations and Investments -- Argentina."
ARGENTINA CREDIT FACILITY. As of February 27, 1998, Nextel Argentina
entered into an $83 million senior secured credit facility (the "Argentina
Credit Facility"). In addition, Nextel Argentina and The Chase Manhattan Bank
entered into an agreement, dated February 27, 1998, pursuant to which the
parties agreed that the aggregate commitments under the Argentina Credit
Facility shall automatically be increased by $17 million to the extent that
additional lenders agree to provide such commitments. Borrowings under the
Argentina Credit Facility are subject to finalizing certain security
arrangements as well as the satisfaction or waiver of certain other conditions.
Loans under the Argentina Credit Facility will bear interest at a rate equal to
either (i) the ABR plus 2.75% (ABR is the highest of the prime rate, the base CD
rate plus 1% and the federal funds rate plus 0.5%) or (ii) the Eurodollar rate
plus 3.75% (the Eurodollar rate is the LIBO rate multiplied by the statutory
reserve rate). The loans under the Argentina Credit Facility will be repaid in
quarterly installments beginning September 30, 2000 and ending March 31, 2003.
See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
PERU. On January 29, 1998, the Company purchased 70.1% of the common
equity of Nextel Peru for $27.9 million, $23.8 million of which will represent
new capital to be contributed to Nextel Peru to finance the expansion, upgrade
and operation of its wireless services business. As of March 15, 1998, the
Company had paid $7.0 million to Nextel Peru, and the remaining $20.9 million
will be paid in the form of capital contributions, which the Company expects
will be made prior to July 30, 1998. Nextel Peru, through its subsidiaries,
currently offers analog SMR services in the greater Lima area, and holds
licenses covering 138 SMR channels. Nextel Peru currently plans to upgrade to
ESMR service in 1999. See "-- The Company's Operations and Investments -- Peru."
PHILIPPINES. In February 1998 the Company reached an agreement in
principle with the three groups of local shareholders of Infocom Communications
Network, Inc. ("Nextel Philippines"), including the Gotesco group (the "Gotesco
Group" and together with the other local shareholders, the "Philippines
Shareholders"), which owns a 20% interest in Nextel Philippines, and is in the
process of finalizing definitive documentation (the "Philippines Partner
Agreement") that would (i) restructure the existing corporate governance
arrangements to give the Company increased minority shareholder rights (the
"Revised Corporate Structure"); (ii) provide for the purchase by the Company of
existing shareholder loans of the Philippines Shareholders totaling
approximately $19.6 million ($2.0 million of which the Company purchased on
February 9, 1998), which loans, upon purchase by the Company, bear interest at
18% per annum and will be convertible into equity of Nextel Philippines; (iii)
provide for the funding by the Company of Nextel Philippines' future capital
needs, currently estimated to be $50 million for 1998, pursuant to loans that
could, at the option of the Company, be converted into equity of Nextel
Philippines; (iv) provide the Gotesco Group with the right to put its 20%
interest to the Company for approximately $9.4 million, beginning nine months
after the closing of the Philippines Partner Agreement (the "Gotesco Put"); and
(v) allow the Company to call the Gotesco 20% interest for approximately $11.6
million, if the Gotesco Group does not exercise the Gotesco Put. The ability of
the Company to convert shareholders loans into equity, satisfy the Gotesco Put
or call the Gotesco 20% interest is subject to applicable Philippines foreign
ownership rules. See "-- The Company's Operations and
Investments -- Philippines" and "-- Corporate Governance -- Philippines."
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MARCH 1998 OFFERING. On March 12, 1998, the Company completed a private
placement offering (the "March 1998 Offering") of its 12 1/8% Senior Discount
Notes due 2008 (the "March 1998 Notes"). The March 1998 Offering generated
aggregate net proceeds to the Company of approximately $387 million. The March
1998 Notes are noncallable for five years and require no interest payment for
the first five years. The March 1998 Offering is part of the Company's financing
plan designed to meet expected funding requirements that are estimated to total
approximately $810 million during 1998 (the "1998 Plan"). See "-- 1998 Plan" and
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
In connection with the March 1998 Offering, the Company consummated the
Clearnet Transaction, pursuant to which a wholly owned subsidiary of Nextel
Communications transferred to the Company 6,777,778 Class D Common Shares of
Clearnet in exchange for 906.32 shares of Series A Preferred Stock. See "-- The
Company's Operations and Investments -- Canada." Additionally, the Company
issued 82.54 shares Series A Preferred Stock to a wholly owned subsidiary of
Nextel Communications for consideration of $8,254,000.
JAPAN. On March 17, 1998, the Company purchased a 21% equity interest in
J-Com Co., Ltd., a digital SMR provider in Japan ("J-Com"), for a purchase price
of approximately $605,000 (the "Japan Acquisition"). The Company also provided a
shareholder loan of approximately $32.1 million to J-Com. J-Com has a
contractual right to provide service under a sublicense covering more than 125
million POPs. DJSMR Business Partnership, a Japanese partnership in which an
affiliate of Motorola is the majority partner, holds a 49% equity interest in
J-Com. The remaining equity interests in J-Com are held by Nichimen Corporation,
an investment firm (which holds a 25% equity interest), and ORIX Corporation, a
leasing firm (which holds a 5% equity interest).
THE COMPANY'S NETWORKS
The following table provides a brief overview of the wireless
communications systems of each of the Operating Companies and MKT as of December
31, 1997 (giving effect to the Argentina Acquisition and the Peru Acquisition,
but excluding the Japan Acquisition).
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NEXTEL SUBSCRIBERS
INTERNATIONAL PROPORTIONATE SYSTEM AS OF START DATE OF
MARKET OWNERSHIP POPULATION(1) POPULATION TYPE 12/31/97 COMMERCIAL SERVICES
- ---------------------- ------------- ------------- ------------- --------------- ----------- ------------------------
(MILLIONS)
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OPERATING COMPANIES:
Brazil.............. 77%(2) 60.0(3) 46.2 SMR/ESMR 19,000 October 1994/1998(4)
Mexico.............. 100% 45.0 45.0 SMR/ESMR 30,000 September 1993/1998(4)
Argentina........... 100% 19.3 19.3 Paging/SMR/ESMR 16,000 April 1996/
February 1997/1998(4)
Peru(5)............. 70.1% 7.0 4.9 SMR/ESMR 3,000 April 1995/1999
Philippines......... 30% 73.0 21.9 Paging/ESMR 55,000 February 1995/1998(4)
Canada(6)........... 19.4% 30.0 5.8 SMR/ESMR/PCS 151,000 April 1994/October 1996/
October 1997
China (Shanghai).... 12.1%(7) 14.0 1.7 GSM 66,000 June 1995
---- ----- ----- -------
Subtotal.............. 248.3 144.8 340,000
PENDING TRANSACTION:
Indonesia 37.5%(8) 19.8 7.4 --
---- ----- ----- -------
Total................. 268.1 152.2 340,000
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(1) Represents estimated population of areas covered by licensed frequencies.
See "-- The Company's Spectrum Position."
(2) Giving effect to the MCS Transaction, the Company through its 81% equity
interest in Nextel Brazil, and Nextel Brazil's 95% equity interest in Nextel
S.A., holds a 77% equity interest in Nextel S.A.
(3) Brazilian law provides that SMR service may only be provided to businesses
and not to individuals.
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(4) The Company currently plans to launch commercial ESMR services in Sao Paulo
in the first half of 1998, in Rio de Janeiro and Buenos Aires in the second
quarter of 1998, and in Mexico City and Manila in the third quarter of 1998.
The timing of the Company's currently planned launch schedule depends on a
number of factors, some of which are beyond the Company's control. See
"-- The Company's Operations and Investments."
(5) Nextel Peru currently offers analog SMR services in the greater Lima area.
The Company currently plans to launch commercial ESMR services in the
greater Lima area in 1999. See "-- The Company's Operations and
Investments -- Peru."
(6) Clearnet publicly reported that it had launched commercial ESMR and PCS
services in Canada's largest urban centers in 1996 and 1997, respectively.
The subscriber numbers are based on the most current subscriber counts
publicly reported by Clearnet and include SMR, ESMR and PCS services.
(7) Represents the Company's share of profits from the Shanghai GSM System,
which is accounted for under the cost method. The Company's share of profits
was diluted from 25.2% to 12.1% in 1997 as a result of an equity investment
by a new shareholder. The subscriber number is based on the most current
subscriber count reported to the Company. See "-- The Company's Operations
and Investments -- Shanghai, People's Republic of China."
(8) Represents the right to acquire a 37.5% equity interest in MKT upon receipt
of required regulatory approval. MKT holds a provisional license for 80 SMR
channels that can be converted to an operating license upon satisfaction of
certain regulatory approvals.
THE COMPANY'S MARKETS
The Company primarily targets emerging markets characterized by large,
unsatisfied demand for telecommunications services, strong long-term economic
growth prospects, highly concentrated population centers and favorable
competitive environments.
LARGE, UNSATISFIED DEMAND FOR TELECOMMUNICATIONS SERVICES. The emerging
markets in which the Company operates are characterized by large, unsatisfied
demand for telecommunications services, resulting in long waiting lists and
significant delays in the installation of phone lines. In these markets,
wireless communications are often a substitute for landline telephone service.
STRONG ECONOMIC GROWTH PROSPECTS. The Company operates primarily in
emerging markets that it believes offer favorable long-term economic growth
prospects.
HIGHLY CONCENTRATED POPULATION CENTERS. The Company primarily focuses its
operations in major population centers of emerging markets, including Sao Paulo,
Rio de Janeiro, Buenos Aires, Mexico City, Lima and Manila. These cities are
characterized by extremely high population densities and a relatively high
concentration of the country's wealth. In addition, vehicle traffic congestion,
low landline penetration and unreliability of the telecommunications
infrastructure encourage the use of wireless communications services in these
cities.
FAVORABLE COMPETITIVE ENVIRONMENTS. Although there is large, unsatisfied
demand for telecommunications services in the emerging markets in which the
Company operates, there are relatively few licensed wireless communications
service providers currently operating in most of its markets.
COMPANY STRATEGY
The Company's principal strategy is to grow by continuing to upgrade and
expand its existing analog SMR wireless communications operations to incorporate
digital wireless communications services, which will enable the Company to
increase its subscriber base and revenues. The Company's strategy also involves
seeking new investment opportunities in markets that satisfy the characteristics
described above. The key elements of the Company's strategy are:
CAPITALIZE ON LEADING POSITION. The Company holds licenses covering more
SMR channels than any other SMR or ESMR system operator in Brazil and Argentina
and believes it is among the largest SMR (and
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potential ESMR) service providers, based on its channel position, in its
principal markets in Mexico, Peru and the Philippines.
EXPAND BY PROVIDING DIGITAL ENHANCED SERVICES. The Company is upgrading
its analog SMR networks to digital ESMR networks using Motorola's iDEN
technology. The upgrade to digital networks will allow the Company to increase
capacity and quality significantly and also offer, in a single digital
subscriber handset, additional services and advanced features. See "-- The
Company's Operations and Investments."
PROVIDE A BROAD INTERNATIONAL NETWORK. The Company intends to deploy a
broad international digital wireless network that will provide roaming
capabilities on a single digital subscriber handset to its subscribers in
selected markets where it provides service. By the end of 1998, the Company
believes that its network will constitute one of the largest ESMR wireless
communications systems in Latin America utilizing a single transmission
technology. The Company's ESMR network is being designed, constructed and
implemented to deliver uniform functionality under the "Nextel(TM)" brand name
by providing the same package of integrated, multiple-feature digital wireless
communications services throughout its network.
BENEFIT FROM NEXTEL COMMUNICATIONS AND MOTOROLA RELATIONSHIPS. Nextel
Communications is the largest SMR and ESMR provider in the United States with
approximately 1,270,700 digital subscriber units in service and approximately
580,000 analog SMR units in service at December 31, 1997. The Company intends to
continue to access the technology, operations, supplier relationships, network
development and marketing expertise of Nextel Communications in upgrading its
SMR networks to ESMR in its existing markets and in entering new markets. In
addition, the Company believes that it will continue to benefit from its
relationship with Motorola, which supplies Nextel Communications and the Company
with iDEN equipment and related services.
MAINTAIN ACTIVE MANAGEMENT ROLE. The Company has acquired controlling
ownership and management positions in its principal markets to the extent local
law does not restrict such foreign ownership or management control positions. As
of December 31, 1997, the Company had a controlling interest in its Operating
Companies in Brazil and Mexico, and, as of January 1998, the Company also had a
controlling interest in its Operating Companies in Argentina and Peru. Where the
Company holds less than a majority interest in an Operating Company, it manages
its investment through contractual arrangements that ensure representation on
the board of directors or comparable governing body and enable it to veto or
require its approval of certain corporate actions. The Company actively
participates in the management of such Operating Companies, other than in China
and in Canada, by (i) selecting the key members of the local management team,
(ii) managing the system's technology and infrastructure deployment, (iii)
developing business plans and marketing plans together with local management,
(iv) maintaining close working relationships with partners, suppliers,
regulators and others and (v) obtaining or arranging for financing.
PURSUE NEW INVESTMENTS IN ATTRACTIVE MARKETS. The Company is pursuing new
investment opportunities in geographic areas that offer attractive market
fundamentals. At present, the Company plans to focus primarily on emerging
markets in Latin America and Asia.
PARTNER WITH STRONG LOCAL GROUPS. Nextel International intends to seek
strong local groups with the financial resources to invest as equity holders at
the Company and Operating Company level. In addition, the Company intends to
seek local partners who can play an active role in assisting the Operating
Companies in securing licenses, obtaining necessary regulatory approvals and
managing governmental relations for the Operating Companies.
WIRELESS TECHNOLOGY
Currently, three systems dominate the market for wireless communications
services: SMR/ESMR, cellular/PCS and paging. The Operating Companies utilize one
or more of each of these forms of wireless communications. The following is a
brief description of each type of wireless communications system.
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SMR/ESMR
SMR, also referred to as "trunked radio" or wireless dispatch
communications, is primarily a business communications tool, which provides cost
effective point-to-multipoint or "one-to-many" voice communications. This
service allows reliable, flexible and convenient communications among a defined
group of users, typically within a business or "work group."
Historically, SMR operators have generally been unable to provide mobile
telephone service competitive with that provided by cellular operators because
of various factors affecting SMR system capacity and voice quality. The primary
factors affecting capacity and voice quality include: the smaller portion of the
radio spectrum allocated to SMR; regulations and procedures that initially
served to spread ownership of SMR licenses among a large number of operators in
each market, thereby limiting the amount of SMR spectrum available to any
particular operator; and the limitations of traditional SMR technology which
employs analog transmission and a single site, high power transmitter
configuration which precludes the use of any given SMR frequency by more than
one caller at a time within a given service area.
Partially as a result of the constraints on capacity, SMR operators,
including the Operating Companies that offer SMR services, have traditionally
emphasized radio dispatch service, which involves shorter duration
communications than mobile telephone service and places less demand on system
capacity. The traditional SMR market, therefore, has been oriented primarily to
business customers such as contractors, service companies, security firms and
delivery services that have significant field operations and need to provide
their personnel with the ability to communicate directly with one another,
either on a one-to-one or on a one-to-many basis. The broader market of
businesses and individuals that are primarily interested in mobile telephone
service has been largely beyond the reach of traditional SMR operators.
The 800 MHz SMR spectrum in the United States and in other countries is
generally adjacent and functionally equivalent to cellular frequencies. As a
result, iDEN digital ESMR technology has been developed by Motorola specifically
to provide digital service using the SMR frequency band. The Company intends to
use iDEN technology in its ESMR networks.
The implementation of an ESMR network utilizing iDEN digital technology
involves upgrading existing 800 MHz SMR systems via two fundamental changes in
system architecture. First, the analog transmission format of traditional SMR
systems is replaced by a digital TDMA transmission format. Second, the single
high-powered transmitter typical of traditional SMR systems is replaced or
augmented by a number of low powered transmitters, dispersed across the coverage
area, enabling frequency reuse. Additionally, the ESMR frequency reuse system
uses a mobile switching office to enable the hand-off of transmissions from one
transmitter to another as subscribers move across the coverage area.
ESMR technology provides the capability to offer integrated wireless
communications services over one network utilizing common cell and digital
switching infrastructures as well as multi-functional handsets. Historically,
the mobile telephone, paging, dispatch and mobile data market segments were
served by discrete networks utilizing separate technologies, handsets and phone
numbers despite the fact that a number of users subscribed to one or more of
these services. In contrast to this historical segmentation of the wireless
industry, the Company believes that ESMR technology will make it possible to
integrate all such segments of wireless mobile communications.
Motorola has developed its proprietary iDEN digital technology, which
allows analog SMR networks to be upgraded to digital ESMR networks offering
enhanced services such as instant conferencing (enhanced dispatch), mobile
telephone (interconnect), short-text messaging with acknowledgment (alphanumeric
paging) and data transmission. The iDEN technology uses a version of the Time
Division Multiple Access ("TDMA") digital transmission technology used by
certain providers of digital cellular services. The iDEN technology that the
Company intends to deploy carries up to three voice and/or control paths per
channel for the ESMR network's mobile telephone function and up to six voice
and/or control paths per channel for the ESMR network's instant conferencing
function.
During the third and fourth quarters of 1996, Nextel Communications
launched commercial service of its current generation iDEN ESMR networks in
several markets in the United States and, during the fourth
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quarter of 1996, Clearnet launched commercial services of its iDEN ESMR network
in the Ontario-Quebec market under the "MiKE(TM)" brand name. Since then, both
Nextel Communications and Clearnet have continued expanding their iDEN digital
ESMR networks in additional markets.
CELLULAR/PCS
Cellular telephone systems are capable of providing high-quality, high
capacity voice and data communications to and from vehicle-mounted and hand-held
radio telephones. Cellular telephone systems are capable of handling thousands
of calls at any one time and providing service to hundreds of thousands of
subscribers in any particular area.
Cellular telephone technology is based upon the division of a given
geographical area into a number of cells and the simultaneous re-use of radio
channels in non-contiguous cells within the system. Each cell contains a low
power transmitter-receiver at a base station that communicates by a switch that
controls the routing of calls and that, in turn, is connected to the public
switched telephone network. The switch enables cellular telephone users to move
freely from cell to cell while continuing their calls.
Cellular telephone systems generally offer subscribers the features offered
by the most up-to-date landline telephone services. Cellular telephone systems
are interconnected with the landline telephone network, which allows subscribers
to receive and originate local, long-distance and international calls from their
cellular telephones. As a result, cellular telephone system operators require an
interconnection arrangement with the local landline telephone companies and the
terms of such arrangements are material to the economic viability of the system.
A cellular telephone system's capacity can be increased in various ways.
Initially, increasing demand may be satisfied by adding available channel
capacity to cells. When all available channels are used, further growth can be
accomplished through a process known as cell splitting. Cell splitting entails
dividing a single cell into a number of smaller cells allowing for greater
channel re-use, thereby increasing the number of calls that can be handled in a
given area.
Currently, the three most widely deployed analog air-interface cellular
standards include Advanced Mobile Phone System ("AMPS"), Nordic Mobile Telephone
("NMT"), and Total Access Communications System ("TACS"). The AMPS and TACS
systems currently operate in the 800 and 900 MHz frequency band and the NMT
systems can operate in either the 450 or 900 MHz ranges. The most prevailing
air-interface standards utilizing digital technology include GSM and Digital
Advanced Mobile Phone System ("DAMPS"). DAMPS systems are currently deployed in
the 800 MHz frequency range and also have been employed in PCS systems
constructed on the 1.8-1.9 GHz frequency ranges. DAMPS utilizes either TDMA or
Code Division Multiple Access transmission techniques. Both AMPS and DAMPS are
the most widely deployed systems in the Americas. GSM, which is widely deployed
in Europe and Asia, can operate at either the 900 MHz or (in an upbanded variant
referred to as GSM/PCS) at the 1.8-2.0 GHz frequency ranges.
PAGING
Paging is a well-established wireless technology, and is widely available
in many countries. A paging system typically consists of a number of transmitter
sites connected to a central messaging center. The messaging center receives
incoming messages from the public telephone network and prepares batches of
messages for transmission to subscribers. There are two basic types of paging
services: numeric (digital display) and alphanumeric, which allows subscribers
to receive and store messages of up to 5,000 characters consisting of both
letters and numbers. Historically, paging was a one-way communication service;
however, technological advances in wireless messaging have made two-way
communications possible. Two-way paging systems allow message acknowledgment
responses and the transmission of short data messages by the paging subscriber.
In emerging markets where telephone penetration is low, paging often provides an
affordable alternative to public telephone service.
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The table below illustrates some of the main differences between SMR/ESMR,
cellular/PCS and paging.
COMPARISON OF SMR/ESMR, CELLULAR/PCS AND PAGING
<TABLE>
<CAPTION>
SMR/ESMR CELLULAR/PCS PAGING
-------- ------------ ------
<S> <C> <C> <C>
Services Offered..................... Voice, data, direct connect Voice and data Data only
(one-to-many and (one-to-one) (one-to-one and
one-to-one) one-to-many)
Typical Frequency Range.............. 800 MHz 800 MHz (cellular) Lowband and 931
1.8 and 1.9 GHz (PCS) MHz
</TABLE>
THE COMPANY'S SPECTRUM POSITION
The Operating Companies' current license holdings represent one of the
largest international wireless footprints, covering approximately 248 million
POPs as of December 31, 1997 (giving effect to the Peru Transaction, but
excluding the Japan Acquisition). The Company's spectrum strategy in the
short-term is to strengthen its channel position in its existing markets in
Latin America and Asia (other than China). The Company will also seek to acquire
SMR channels or other wireless communications spectrum in other selected urban
centers having attractive economic characteristics on an opportunistic basis.
In order to construct a digital network utilizing iDEN technology, the
Company believes that at least 100 SMR channels are necessary in any given
market. Generally, the Company estimates that each SMR channel has the capacity
to provide service to approximately 100 subscribers using analog SMR technology.
Deploying digital technology on these SMR channels will increase subscriber
capacity significantly. Moreover, the Company believes its large channel
position reduces capital expenditures required to upgrade to digital networks.
Nextel International generally owns or has options to acquire at least 100
channels in the principal markets in which it intends to construct digital
networks. In smaller markets, Nextel International will continue to focus its
efforts on growing its analog SMR operations and subscriber base.
NETWORK IMPLEMENTATION, DESIGN AND CONSTRUCTION
The Company's networks are in various stages of development. In 1997, the
Company commenced the design, development and construction of its ESMR networks
in Argentina, Brazil, Mexico and the Philippines.
The Company's critical design criteria for its upgrade to ESMR networks
include:
- Contiguous wide area coverage of substantially all of the major
population areas and traffic corridors in its licensed areas;
- Signal quality comparable to that currently provided by existing
cellular and/or PCS carriers in such licensed areas;
- Call "hand-off" for mobile telephone service throughout the ESMR
networks;
- Minimization of blocked and dropped calls;
- The ability to offer advanced features such as data transmission and
message services; and
- Cost-efficient routing of calls to minimize local interconnection
costs and toll charges and to provide maximum utilization of the
Company's ESMR network facilities.
The Company believes careful frequency planning is necessary prior to
commencing network construction in order to ensure satisfactory coverage over
the entire ESMR network. Frequency planning involves the
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selection of specific areas in the Company's markets for the placement of
transmitter sites and the identification of specific frequencies that will be
employed at each site in the initial configuration. Sites are selected on the
basis of their coverage and on frequency propagation characteristics.
In addition to frequency planning and system design, the implementation of
the proposed digital wireless networks requires site acquisition, equipment
procurement, construction and equipment installation, testing and optimization.
Sites are selected on the basis of their proximity to targeted customers, the
ability to acquire and build the site and frequency propagation characteristics.
Site procurement efforts include obtaining leases and permits and, in many
cases, zoning approvals. Once the requisite governmental approvals are obtained,
the preparation of each site, including grounding, ventilation, air conditioning
and construction, typically takes three months, while equipment installation,
testing and optimization generally takes an additional four weeks. Following
commencement of system operations in a selected market, the Company expects to
add new sites to its networks continually in order to improve coverage and
capacity.
In certain instances, the Company's ability to proceed with the build-out
of its ESMR networks in its coverage areas or elsewhere may be subject to
successful negotiation of site acquisitions or leases, the availability of
equipment and receiving necessary governmental approvals. In addition, the
timing of the scheduled build-out will be subject to obtaining additional
financing on a timely basis and typical construction and other delays. See
"-- Risk Factors -- Significant Capital Requirements for Operations" and
"-- Expansion; Management of Growth."
MARKETING
Nextel International markets its wireless communications services primarily
to business customers and mobile work forces, such as service companies,
security firms, contractors and delivery services. Companies with mobile work
forces represent growing sectors of the economies in the Company's markets.
These types of businesses often have the need to provide their personnel with
the ability to communicate directly with one another, either on a one-to-one or
one-to-many basis. By upgrading its operations to provide ESMR services, the
Company will increase significantly the quality and capacity of its wireless
communications networks utilizing SMR frequencies and be in a position to offer
a broader array of digital wireless services to a larger customer base. For a
more detailed description of the marketing focus of each Operating Company, see
the "Marketing" discussion for each Operating Company under "-- The Company's
Operations and Investments."
COMPETITION
In each of the markets where the Operating Companies operate or will
operate, the Company competes or will compete with other communications services
providers, including landline telephone companies and other wireless
communications companies. Many of the Company's competitors are well-established
companies with substantially greater financial and marketing resources, larger
customer bases, and better name recognition than the Company, and in certain
markets may be able to provide coverage to a larger number of subscribers. In
addition, many existing telecommunications enterprises in the markets in which
the Operating Companies conduct business have successfully attracted significant
investments from multinational communications companies. Because of their
financial resources, these competitors may be able to reduce prices in order to
gain market share. The Company expects that the prices it charges for its
products and services will decline over the next few years as competition
intensifies in its markets. Because iDEN technology is not compatible with other
digital cellular or PCS technologies, the Company's customers will not be able
to roam on cellular or PCS systems. For a more detailed description of the
competitive factors affecting each Operating Company, see the "Competition"
discussion for each Operating Company under "-- The Company's Operations and
Investments." See also "-- Risk Factors -- Competition."
In addition, the regulatory environment in the countries where the
Operating Companies conduct their business impose or may impose limitations that
adversely affect the Company's competitive position. Certain provisions of the
Brazilian SMR regulations impose limitations or restrictions on the Company that
are not imposed on other Brazilian wireless service providers. Accordingly, such
regulations may limit the Company's
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ability to compete effectively with other wireless communications service
providers in Brazil, including the operators of the Band B cellular licenses.
See "-- The Company's Operations and Investments -- Brazil -- Regulatory and
Legal Overview."
GOVERNMENT REGULATION
The licensing, construction, ownership and operation of wireless
communications systems, and the grant, maintenance and renewal of applicable
licenses and radio frequency allocations, are regulated by governmental entities
in the markets in which the Operating Companies conduct business. In addition,
such matters and certain other aspects of wireless communications system
operations, including rates charged to customers and the resale of wireless
communications services, may be subject to public utility regulation in the
jurisdiction in which service is provided. Further, statutes and regulations in
certain of the markets in which such Operating Companies conduct business impose
limitations on the ownership of telecommunications companies by foreign
entities. Changes in the current regulatory environments in such countries, or
future judicial intervention, including with respect to interconnection
arrangements, requirements for increased capital investments, regulations
affecting prices the Operating Companies are able to charge for their services
or foreign ownership limitations, could have a material adverse effect on the
Company. For a more detailed description of the regulatory environment in each
of the countries in which the Operating Companies conduct business, see the
"Regulatory and Legal Overview" discussion for each Operating Company under
"-- The Company's Operations and Investments" and "-- Risk Factors -- Government
Regulations."
THE COMPANY'S OPERATIONS AND INVESTMENTS
The Operating Companies offer wireless communications services in Latin
America (Brazil, Argentina, Mexico and Peru), Asia (Philippines and Shanghai,
China) and Canada. The Company has the right to purchase a 37.5% equity interest
in MKT, which holds a provisional license for 80 SMR channels in Indonesia,
subject to the receipt of regulatory approval. In addition, in March 1998, the
Company purchased a 21% equity interest in J-Com. See "-- Post Fiscal Year-End
Transactions." See also "-- Corporate Governance."
BRAZIL
OPERATING COMPANY OVERVIEW. Nextel Brazil provides analog SMR services in
15 of Brazil's largest cities including Sao Paulo, Rio de Janeiro, Belo
Horizonte and Brasilia under the tradename "Airlink." Nextel Brazil has over 390
SMR channels installed and operational in Brazil and operates 26 radio-antenna
sites. Nextel Brazil has a centralized customer service and installation center
located in Sao Paulo. As of December 31, 1997, Nextel S.A. provided service to
approximately 19,000 analog SMR subscriber units.
Nextel Brazil currently plans to launch ESMR commercial service using the
"Nextel(TM)" tradename in Sao Paulo in the first half of 1998 and in Rio de
Janeiro in the second quarter of 1998. The Company intends to evaluate the
timing of any steps in connection with an upgrade to ESMR in Belo Horizonte and
any other cities in Brazil where the Company owns or has options to acquire at
least 100 channels, based on the competitive and regulatory environment. The
upgrade to a digital system will increase system capacity and allow Nextel
Brazil to offer a broader range of options to a larger group of business
customers. System design for the greater Sao Paulo area and Rio de Janeiro is
completed, construction is under way in both cities and the Company has
purchased iDEN equipment from Motorola for each city. See "-- Risk Factors --
Government Regulation" and "-- Expansion; Management of Growth."
Nextel S.A. is headquartered in Sao Paulo and has branch offices in seven
other major cities. As of December 31, 1997, Nextel S.A. had 311 employees.
MARKETING. Nextel Brazil offers both a broad range of options and pricing
plans designed to meet the specific needs of its targeted business customers. It
currently offers analog SMR dispatch and integrated service plans (dispatch and
interconnect). The sales and marketing efforts of Nextel Brazil currently focus
primarily on providing cost-effective local and regional integrated services for
their analog SMR customers. In accordance with the requirements of Brazilian SMR
regulations, the Company markets its services to
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<PAGE> 14
businesses and not to individuals. The Company's target markets are businesses
engaged in transportation, construction, security, services and also include
utilities and government agencies. Nextel Brazil utilizes both a direct sales
force as well as dealers and independent agents. It currently has over 81 direct
sales representatives and 8 dealers and independent agents.
COMPETITION. Nextel Brazil is the largest analog SMR service provider in
Brazil. In addition, it has the largest SMR channel position of any other
service provider in Brazil. There are a number of SMR competitors in Brazil,
including MComCast (a joint venture between Comcast Corporation and Banco
Garantia), Radio Movel Digital Americas, Inc. and Via Um.
Brazil is one of the last major emerging countries to have only one
cellular provider in most of its markets. Telecomunicacoes Brasileiras S.A.
("Telebras"), the government-owned holding company that controls the local
telephone operators, is currently the only provider of cellular service in most
of Brazil.
PARTNER DESCRIPTION. On January 30, 1997, Nextel Communications acquired
an 81% equity interest in Nextel Brazil for a purchase price of $186.3 million,
which was paid with shares of Nextel Communications Class A Common Stock, and
simultaneously contributed its interest in Nextel Brazil to the Company. Telcom
Ventures, LLC ("Telcom Ventures") and certain affiliates of Telcom Ventures
(together, the "Telcom Group") own the remaining 19% equity interest in Nextel
Brazil.
On September 26, 1997, Nextel S.A. acquired 49% percent of the capital
stock of MCS, an indirect wholly-owned subsidiary of Motorola in exchange for
$1.9 million and 5% of the outstanding capital stock of Nextel S.A. (which is
held by Motorola International), thereby diluting the Company's effective
ownership interest in its Brazilian operations to 77%. Upon the approval of the
Brazilian regulatory authorities, Nextel S.A. has the option to purchase the
remaining 51% of the capital stock of MCS, which will be exercisable for $3.2
million.
REGULATORY AND LEGAL OVERVIEW. On November 3, 1997, the Brazil Ministry of
Communications issued new regulations governing SMR service providers in Brazil.
These new regulations (Ordinance 557, which adopted Norma 14/97 ("Norma 14/97"))
impose limits on the types of customers that an SMR provider can serve, the
number of telephone numbers granted to an SMR provider, the amount of
interconnect traffic allowed with respect to a provider's network, the number of
channels a provider can hold, and provides for consolidation of multiple
licenses under one license and various technical specifications for wireless
communications networks.
On July 16, 1997, the Agencia Nacionel de Telecomunicacoes ("Anatel") was
created by the General Law (as defined below) as an independent agency in charge
of regulating telecommunications services and performing many of the tasks
formerly performed by the Brazil Ministry of Communications. Anatel is in charge
of implementing Norma 14/97, issuing specific regulations and licenses
(concessions, authorizations and permissions) and applying the relevant
penalties for each segment of the telecommunications services. Anatel is
governed by a Board of Directors composed of five members appointed by the
President of Brazil after approval by the Senate.
Many aspects of the law, rules and regulations applicable to the Company's
SMR and proposed ESMR business in Brazil are relatively new and still
developing. As a result, it is difficult to determine how regulators will
interpret rules or judge compliance and what if any enforcement action would be
taken. The Company has had numerous meetings and discussions with various
Brazilian governmental and regulatory authorities, including representatives of
the Brazil Ministry of Communications and Anatel, regarding its ownership and
operation of SMR frequencies and its planned launch and operation of its ESMR
network in markets in Brazil. These discussions have been informal and are not
binding on the regulatory authorities. Although the Company expects that further
clarifying interpretations and refinements will be promulgated by the
appropriate Brazilian governmental and regulatory authorities in the future, the
Company believes that it has a fundamentally sound and well-informed
understanding of and basis for interpreting the current regulatory framework
(including Norma 14/97), and will be able to implement its business plans in
Brazil substantially as currently contemplated. There can be no assurance that
the Brazilian governmental and regulatory authorities, including particularly
Anatel, in the future will not modify or interpret the existing regulatory
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<PAGE> 15
framework in ways, or adopt further or replacement legislation, rules, or
regulations, that could significantly restrict or otherwise materially adversely
affect the Company's Brazilian operations. See also "-- Risk
Factors -- Government Regulation."
Norma 14/97 requires that SMR service be provided only to legal entities or
groups of legal entities for the performance of specific activities. SMR service
may not be provided to individual subscribers and all SMR subscriber units must
be capable of providing dispatch service. Under Norma 14/97, an SMR service
provider must apply to the public switch telecommunications network ("PSTN") to
obtain blocks of telephone numbers to be issued by such PSTN for use by the SMR
service provider's subscribers. The PSTN will forward the request to Anatel and
Anatel will inform the SMR provider of the allotment of numbers. The telephone
numbers granted to an SMR provider by Anatel cannot exceed 50% of the total
number of SMR mobile subscriber units that the SMR service provider projects to
be in operation in accordance with its schedule for the deployment of services.
Norma 14/97 prohibits an operator of a PSTN from adopting practices that
inhibit competition or procedures that result in discrimination of any kind
against SMR license holders. Accordingly, Norma 14/97 contemplates that each SMR
provider may obtain interconnect to the PSTN pursuant to interconnect agreements
with the operators of the PSTN. If interconnect negotiations do not produce an
interconnect agreement within 60 days of the commencement of negotiations or if
full interconnection is not implemented within 90 days of the conclusion of
negotiations, either party to the negotiation may refer the matter to Anatel for
resolution.
Norma 14/97 also limits the volume of interconnect traffic for SMR service
providers. Norma 14/97 provides that within an SMR service provider's network,
the volume of traffic interconnected with the PSTN cannot exceed one-third of
the sum of intra-network traffic volume and outgoing calls interconnected to the
PSTN. For purposes of calculating the number of intra-network calls, each
subscriber unit called during a one-to-many dispatch call counts as one
intra-network call. The evaluation of the traffic volumes for the purposes of
the above restrictions is to take place every four months. In the event that the
interconnect regulations are violated by the license holders, their licenses are
subject to suspension under Norma 14/97. The Company has executed an
interconnect agreement with Telecomunicacoes de Sao Paulo S.A. ("Telesp") and
Telebras for the provision of interconnect services on its ESMR network in Sao
Paulo.
In addition, Norma 14/97 provides that SMR license holders may not hold
more than 200 SMR channels (10 MHz) in each geographic area. Norma 14/97 permits
SMR licensees that are under common ownership or control to request Anatel to
consolidate their SMR channels, subject to the 200 channel limitation, under one
SMR licensee. The Company currently holds 210 channels in Sao Paulo and under
Norma 14/97, the Company has until November 3, 1998 to eliminate channels and
seek approval of the consolidation of its licenses, including those that it has
options to acquire from third parties. Anatel must approve any request for
consolidation within three months of receipt of such request. Although the
Company has applied for approval to consolidate the ownership of its licenses,
there can be no assurance that such approval will be granted by Anatel. Upon
effectuation of such consolidation by Anatel, the Company intends (i) to request
permission from Anatel that the SMR licensees holding the consolidated channels
be merged into Nextel S.A. and (ii) to cause the SMR licensees that no longer
hold SMR channels to be merged into Nextel S.A. or dissolved.
Nextel Brazil's interest in licensees holding 1,180 of its 1,955 channels
in Brazil is structured pursuant to a number of option agreements (the "Option
Agreements") entered into with the shareholders of the respective corporate
licensees of such channels. Pursuant to the Option Agreements, Nextel Brazil,
through its subsidiaries, has acquired a minority interest in each such licensee
not exceeding 49%. While Nextel Brazil has exercised the options under all of
the Option Agreements, the actual transfer of the balance of the ownership
interest in each such licensee is subject to approval of Anatel. Approval for
change of control can only be granted after a system installation has been
completed, and many of the channels that are the subject of Option Agreements
have not been installed. The Company is currently conducting analog SMR system
installation with regard to a significant portion of the channels that are
subject to the Option Agreements. While the Company believes it will receive
Anatel approval when it has met the installation requirements, no
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<PAGE> 16
assurance can be given that such approval will be obtained. To the extent the
Company is not able to acquire the balance of the ownership interest in a
particular licensee, the Company believes that Nextel S.A., would be able to
continue to maintain its contractual right to render managing services for the
operations subject to the license held by such licensee pursuant to a service
agreement and receive fees under such service agreement. However, the Company
would not own such license and the Company's rights with respect to such license
could be limited. There can be no assurance that Anatel would not challenge the
validity of such service agreements. All of Nextel Brazil's channels in Sao
Paulo are indirectly and entirely owned by Nextel S.A. and are not held pursuant
to Option Agreements.
The Company's planned launch schedule for ESMR commercial service in Sao
Paulo is based on a number of important factors, the most significant of which
are the receipt prior to such launch of: (i) use and operations licenses
("Operations Licenses") for the sites located in the greater Sao Paulo area;
(ii) project installation approval from Anatel and (iii) post-installation
operating approval from Anatel. Applications for Operations Licenses are filed
with the city government and require the approval of four separate departments,
three of which are municipal departments (secretary of housing, planning bureau
and secretary of construction and safety) and the fourth of which (fire
department) is a state government department.
Although the Company believes it will obtain sufficient Operations Licenses
to launch commercial operation of digital ESMR services in Sao Paulo prior to
the end of the first half of 1998, no assurance can be given that it will be
able to do so. Any delay in obtaining Operations Licenses for the sites
necessary for commercial operation of digital ESMR services in Sao Paulo or
Anatel project or post-installation approvals would delay the launch of
commercial ESMR service in Sao Paulo to after the first half of 1998.
The Company has applied to Telesp to obtain a block of telephone numbers
under Norma 14/97 and Nextel Brazil is awaiting the allotment of telephone
numbers from Anatel.
The Company's planned launch of ESMR commercial service in Rio de Janeiro
during the second quarter of 1998 is also subject to the receipt prior to such
launch of Anatel project and post-installation operating approvals as well as
Operations Licenses for sites located in the greater Rio de Janeiro area. Any
delay in obtaining such Operations Licenses or Anatel project or
post-installation operating approvals would delay the launch of commercial ESMR
service in Rio de Janeiro to after the second quarter of 1998.
Since July 13, 1994, it had been the Brazil Ministry of Communication's
practice to grant SMR licenses for a 15-year period and to renew such licenses
for an equal period upon submission of an application to the Brazil Ministry of
Communications. Certain of the Company's licenses granted prior to July 13, 1994
were granted for a term of five years and the Company has been informed by the
Brazil Ministry of Communications that such licenses have been automatically
extended for a term of 15 years from their original issuance date. Effective
July 20, 1996, however, Law No. 9295 (the "Minimum Law"), modified existing law
so that SMR licenses granted after such effective date are issued for a period
of ten years and renewable for an additional ten-year period upon submission of
an application to the Brazil Ministry of Communications. The reduction to ten
years of the term and renewal periods for the licenses was confirmed by Decree
No. 2197, effective April 19, 1997. In either case, a license will be renewed
absent existing violations of applicable rules and regulations and upon
application 18 months prior to the expiration of the license. All of the
Company's licenses were granted prior to July 20, 1996. Notwithstanding the
Minimum Law, a bill was signed into law on July 16, 1997 (the "General Law"),
which, among other things, revokes several provisions of the Minimum Law,
including the ten-year license term. Pursuant to the General Law, absent any new
regulations, existing SMR licenses will remain valid for the term for which they
were issued. However, to be renewed or extended, the term of the licenses must
be adapted to comply with the General Law. The General Law does not specify the
term of renewal or extension of SMR licenses.
The Brazil Ministry of Communications has previously established
comprehensive operating standards and requirements applicable to SMR licensees,
which remain in effect notwithstanding the enactment of Norma 14/97. A license
holder of SMR channels is required to meet certain installation and minimum
loading requirements. Failure to comply with such requirements may subject the
licenses relating to such channels to revocation by the Brazil Ministry of
Communications. Certain SMR equipment must be installed within 12 months after
receiving an SMR license from the Brazil Ministry of Communications. Additional
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installation time may be permitted if more than four repeater stations are being
installed. The installation time also may be extended at the discretion of the
Brazil Ministry of Communications if circumstances beyond the control of the
licensee contribute to the delay. Under the former rules, which still apply to
the Brazilian operating companies' SMR licenses, the period for installation of
the equipment was 12 months, which could be extended, in case of occurrence of
events beyond the control of the license holder, at the discretion of the Brazil
Ministry of Communications. Further, installation cannot be extended for longer
than six months after the agreed upon installation date. The Brazil Ministry of
Communications requires each channel to be loaded with 30 SMR radios within six
months of the completion of the installation, and with 70 SMR radios within four
years of such date. The Brazilian operating companies currently are not in
compliance with applicable installation deadlines and minimum loading
requirements with respect to licenses covering 545 channels, all of which are
outside of Sao Paulo. Requests for extensions of the deadlines relating to all
such licenses have been filed with the Brazil Ministry of Communications, except
for channels where the Brazilian operating companies failed to comply with
applicable installations requirements due to television frequency interference,
for which extensions were granted automatically by statute. No responses,
however, have been received to date with respect to such requests. There can be
no assurance that the Brazil Ministry of Communications will not take action in
response to such failure to comply, which would have an adverse effect on Nextel
Brazil.
Any Brazilian company headquartered in Brazil is eligible to obtain
licenses to operate SMR services and there are no limitations on foreign
ownership of such companies. However, under Decree No. 2197, SMR licenses can
only be obtained pursuant to a public bid.
On February 20, 1997, the Brazilian Ministry of Communications released the
new SMR Rules (the "New SMR Rules") (i) permitting the combination of adjacent
channels in certain frequencies in the 400 MHz, 800 MHz and 900 MHz band and
(ii) mandating the use of digital technology for SMR systems operating in
channels 401 to 600 of the 806-821 MHz and 851-866 MHz bands. The New SMR Rules
also provide that channels, which have already been assigned to licensees,
including the Company, will be the object of a study addressing the prospective
regrouping of such channels for application in systems using digital technology.
In addition, Norma 14/97 established that the Brazil Ministry of Communications
by request of all permit holders involved can change the SMR channels consigned
to a particular holder provided that this alteration: (a) does not involve
channels intended exclusively for digital modulation techniques, according to
the SMR implementation planning; (b) exclusively includes channels already
consigned to the interested parties; (c) involves only channels that are in the
same radio frequency band and refer to the same service rendering area; and (d)
provides each of the permit holders involved with the same number of consigned
channels. Because the New SMR Rules allow SMR operators to combine adjacent
channels to create contiguous blocks and may provide for a regrouping of SMR
channels to create more contiguous blocks in the future, SMR operators may have
additional technology choices available to them. Although the Company does not
believe that the New SMR Rules will materially affect its technology decisions
or the attractiveness of Nextel Brazil's product or service offerings, the New
SMR Rules and technology decisions by other SMR operators, including existing
and future competitors, may increase competition in Brazil.
From June 1997 to February 1998, the Government of Brazil awarded Band B
cellular licenses covering four of the ten areas throughout Brazil, including
the city of Sao Paulo, pursuant to the Band B Rules released January 13, 1997.
The Band B Rules divide the country into ten regions for the auction of Band B
cellular licenses. Under the Band B Rules, a cellular license winner can provide
service in only one major Brazilian market and one secondary market (e.g., the
winner of the Sao Paulo license will be precluded from owning the Rio de Janeiro
license). In addition, future licensing and commencement of cellular services
will not be permitted until December 31, 1999, except by the existing Brazilian
cellular system operator, Telebras, and the holders of the Band B cellular
licenses. Some of the largest telecommunications companies in the world have
been and are expected to be granted cellular licenses in the Band B auction,
which will result in significant competition in the Company's Brazilian markets.
The Company does not believe that the Band B Rules are applicable to its planned
ESMR operations in Brazil. There can be no assurance, however, that Anatel or
companies bidding for Band B licenses will not challenge the Company's offering
of ESMR services before December 31, 1999. In addition, companies bidding for
the Band B licenses may request that the December 31, 1999 date be extended or
seek clarification as to the applicability of the Band B Rules to ESMR
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services. Such a challenge, if successful, would have a material adverse effect
on the Company's competitive position in Brazil and on its business and results
of operations.
On April 26, 1997 and in the beginning of June 1997, news reports appeared
in the Brazilian newspapers and international wire services that an anonymous
source had forwarded to the Brazil Ministry of Communications a copy of the
Company's offering memorandum prepared in connection with the March 1997
Offering and a letter alleging that the Company was operating in Brazil without
authorization of the Brazil Ministry of Communications. Based on these
allegations, the Brazil Ministry of Communications sent to the Company a copy of
the letter requesting its comments regarding the allegations. On June 6, 1997,
the Company sent to the Brazil Ministry of Communications a letter in response
to the allegations. The Company has not received any further inquiry or comment
from the Brazil Ministry of Communications or Anatel regarding such allegations.
The Company believes that the then current regulatory framework permitted the
operation of its then existing business in Brazil and believes that the
provisions of Norma 14/97 further support that belief.
The purchase and sale of foreign currency in Brazil are subject to
governmental control. There are two foreign exchange markets in Brazil that are
subject to Central Bank of Brazil regulations. The first is the
commercial/financial floating exchange rate market which is reserved generally
for (i) trade-related transactions, such as import and export transactions; (ii)
registered foreign currency investments in Brazil; and (iii) certain other
transactions involving remittances abroad. The second is the tourism floating
exchange rate market. The commercial/financial exchange market is restricted to
transactions, which require prior approval of the Brazilian monetary
authorities. Both markets operate at floating rates freely negotiated between
the parties. The purchase of currency for repatriation of capital invested in
the country and for payment of dividends to foreign shareholders of Brazilian
companies is made in the commercial/financial floating market, provided that the
original investment of foreign capital and capital increases were registered
with the Central Bank of Brazil. In this case, there are no significant
restrictions on the repatriation of share capital and remittance of dividends.
The majority of the capital of Nextel S.A., the Brazilian subsidiary through
which any dividends are expected to flow, has been registered with the Brazilian
monetary authorities, and Nextel S.A. intends to structure future capital
contributions to Brazilian subsidiaries to maximize the amount of share capital
and dividends that can be repatriated through the commercial financial exchange
market. There can be no assurance that Nextel S.A. can repatriate through the
commercial financial exchange market share capital and dividends on foreign
investments that have not been registered.
Brazilian law provides that whenever there is a material imbalance or a
serious risk of a material imbalance in Brazil's balance of payments, the
Brazilian government may, for a limited period of time, impose restrictions on
the remittance by Brazilian companies to foreign investors of the proceeds of
investments in Brazil. The Brazilian government may also impose restrictions on
the conversion of Brazilian currency into foreign currency. Any such
restrictions may hinder or prevent the Company from purchasing equipment
required to be paid for in any currency other than Brazilian reais. Under
current law, there is a 15% withholding tax on interest payments. Dividends paid
out of profits generated after December 31, 1996 are currently not subject to
withholding tax.
MEXICO
OPERATING COMPANY OVERVIEW. Nextel Mexico began commercial analog SMR
operations in September 1993 under the brand name "Tricom." Nextel Mexico,
through its subsidiaries and management agreements, provides analog SMR services
in 15 cities and along a number of major highways. As of December 31, 1997,
Nextel Mexico provided service to approximately 30,000 analog SMR subscriber
units. The cities in which Nextel Mexico holds SMR licenses include: Mexico City
(with a total of 204 channels representing approximately 10 MHz), Guadalajara
(with a total of 60 channels) and Monterrey (with a total of 25 channels). As of
December 31, 1997, Nextel Mexico had 56 analog SMR transmitter sites in
operation. Nextel Mexico has deployed Motorola, Uniden, Nokia and General
Electric technology in its analog SMR networks.
Nextel Mexico currently plans to launch commercial service in Mexico City
on its ESMR network in the second quarter of 1998 under the brand name
"Nextel(TM)." While migrating its analog SMR customers in
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Mexico City to the digital network, the Company plans to operate parallel
digital and analog networks. As part of the migration process, the company will
encourage its higher usage customers to convert to the digital ESMR network so
they can benefit from the broader range of service offerings. Digital service
offerings will include interconnect services, dispatch radio and paging using
one multi-functional handset. Initially, the company will target the mobile
workforce, which it believes will be the most likely users of its ESMR network's
integrated services.
Nextel Mexico's assets also include 1,040 channels in the 400 MHz frequency
band covering central and northern Mexico. Nextel Mexico currently is
considering a sale of its 400 MHz channels that are not central to Nextel
Mexico's business plan. In addition, Nextel Mexico has built a digital microwave
network throughout central and northern Mexico to provide long distance services
for its customers. The Company has entered into arrangements for the lease of
excess capacity on its digital microwave network with Telecomunicaciones
Globales, S.A. de C.V., a company in which the Company holds a 3.0% equity
interest.
In 1995 and 1996, Nextel Mexico experienced high rates of churn (reaching
an average of 3.7% per month over the two-year period), which the Company
believes was caused primarily by the economic downturn in Mexico. Further, the
company suffered from a high level of bad debt expense. To address these
problems, Nextel Mexico's board of directors appointed a new chief operating
officer in the fourth quarter of 1996. The primary short-term objectives of the
company were to: (i) implement a plan to reduce overall operating expenses; (ii)
build a high quality customer base and focus on maximizing profitability rather
than building market share; and (iii) establish a high level of customer
service, comparable in quality to the customer service provided by wireless
communications companies in the United States. Since the appointment of the new
chief operating officer, the bad debt expense has decreased significantly.
Nextel Mexico is headquartered in Mexico City and has branch offices in
Guadalajara, Monterrey and Tijuana. As of December 31, 1997, Nextel Mexico had
215 employees in Mexico.
MARKETING. Nextel Mexico offers its analog SMR customers a broad range of
services and pricing plans designed to meet the specific needs of these
customers. Nextel Mexico offers both dispatch only and integrated service plans
(dispatch and interconnect) on its analog SMR network. These plans include sale
or rental of various models of handsets. The basic price package consists of a
monthly fee and interconnect and dispatch charges depending on minutes of use.
Unlike many SMR providers, the Company sells the majority of its handsets
instead of leasing handsets.
Nextel Mexico's sales and marketing efforts focus primarily on providing
cost-effective local and regional analog SMR dispatch radio services to its
target customers, which are generally businesses engaged in manufacturing and
distribution. Nextel Mexico markets its analog SMR services through a
multichannel distribution network including direct sales representatives and
independent dealers. Direct sales representatives account for approximately 30%
of new customers and distributors account for approximately 70%.
COMPETITION. Nextel Mexico is the largest SMR provider in Mexico, both in
terms of channels and subscribers and has an approximately 30% market share. The
second largest SMR operator in Mexico is Radiocel, S.A. de C.V., with a 27%
market share. Other significant operators include Intercom and Multicom. The
Mexican cellular market is divided into nine regions and there are two cellular
licensees per region. Telefonos de Mexico, S.A. de C.V. ("Telmex"), Mexico's
national telephone company, has a nationwide cellular license. In the Mexico
City region and throughout most of the southern portion of Mexico, the second
cellular carrier is Iusacell, S.A. de C.V. (a joint venture controlled by Bell
Atlantic). In the northern part of Mexico, cellular carriers include Movitel
S.A. de C.V., Cedetel, Norcel and Baja Celular Mexicana. Motorola is a
shareholder of each of the foregoing companies. Poctatel del Sureste is also
active in Southern Mexico.
As part of its drive to improve and increase Mexican telecommunications
services, the Mexican government has announced its intention to auction a number
of licenses to provide wireless communications services, including licenses for
dispatch services in the 900 MHz frequency band, for narrowband dispatch
services in the 220 MHz frequency band and for PCS. These auctions, which are
anticipated to occur during 1998, will increase the number of actual and
potential competitors that Nextel Mexico will face.
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REGULATORY AND LEGAL OVERVIEW. The Secretary of Communications and
Transportation (the "SCT") regulates the telecommunications industry in Mexico.
Since early 1994, the Mexican government has been deregulating the
telecommunications industry in order to improve the quality and expand the
coverage of telecommunications services. The Mexican government has stated its
intention to increase competition within the telecommunication industries and
its desire to attract foreign investment for the purpose of improving Mexico's
telecommunications infrastructure. Mexico's Federal Telecommunications Law (the
"Mexican Federal Telecommunications Law"), which became effective in June 1995,
outlines the broad rules for opening the local and long distance service markets
to competition.
The Mexican Federal Telecommunications Law requires that all
telecommunications licenses (referred to as "concesiones" in Mexico) must be
owned by entities that do not have more than 49% of their voting equity interest
owned by non-Mexican entities. Although such 49% limitation existed prior to the
enactment of the Mexican Federal Telecommunications Law for certain types of
telecommunications licenses, SMR licenses issued prior to the effectiveness of
the legislation could be owned by entities wholly owned by non-Mexicans. Nextel
Mexico believes that in accordance with the terms of the Mexican Federal
Telecommunications Law and Mexican constitutional law principles, the 49%
limitation on non-Mexican participation does not apply to the SMR licenses in
which it had an interest at the time of the effectiveness of the Mexican Federal
Telecommunications Law. Consistent with this view, in May 1996, the SCT amended
all of the 800 MHz SMR licenses issued prior to the effective date of the
Mexican Federal Telecommunications Law in which Nextel Mexico had an interest to
delete a provision limiting non-Mexican participation to 49%. Accordingly, all
of the 800 MHz SMR licenses in which Nextel Mexico has an interest, except for
one license covering 10 channels along a major highway from Mexico City to
Guadalajara, were amended to remove the 49% foreign-ownership limitation.
Although licenses to provide cellular services are also subject to the 49%
limitation on foreign ownership, the Mexican Federal Telecommunications Law
explicitly provides for a waiver procedure of such limitations for cellular
providers upon receipt of a favorable opinion from the Mexican National Foreign
Investments Commission. Unless the Nextel Mexico obtains a waiver with respect
to the 49% limitation on foreign ownership with respect to the license covering
the 10 channels between Mexico City and Guadalajara or is otherwise able to
structure future SMR license acquisitions to comply with such limitation, the
provisions of the Mexican Federal Telecommunications Law will prevent the
Company from having a controlling interest in such license and/or obtaining a
controlling interest in additional licenses, including licenses for additional
channels needed to build-out digital mobile networks in markets outside of
Mexico City.
The Mexican Federal Telecommunications Law provides all wireless services
providers with the right to interconnect to the public switched network operated
by Telmex. Certain telecommunications companies, however, have had difficulty
obtaining interconnect services from Telmex despite negotiating and executing an
interconnect agreement with Telmex. Nextel Mexico has entered into interconnect
agreements with Telmex for analog SMR service and currently provides
interconnect services through Telmex to a limited number of its analog SMR
subscribers. Nextel Mexico plans to increase subscriber interconnection
significantly as it upgrades its analog SMR network to an ESMR network. Any
failure to enter into an interconnect agreement with Telmex or to obtain
interconnect services from Telmex after entering into such agreement will delay
Nextel Mexico's commercial launch of ESMR services and would have a material
adverse effect on its results of operations. See also "-- Risk
Factors -- Government Regulation."
Mexican companies may remit dividends and profits outside of Mexico if the
Mexican company meets certain distribution and legal reserve requirements. A
Mexican company must distribute 10% of its pretax profits to employees and
allocate 5% of net profits to the legal reserve until 20% of the stated capital
is set aside. Although the Company's investment in Nextel Mexico is registered
with the Mexican National Registry of Foreign Investments, registration is no
longer a prerequisite for the remittance of dividends and profits outside of
Mexico. Under Mexican corporate law, approval of a majority of shareholders of a
corporation is required to pay dividends. Dividends paid by Nextel Mexico to its
U.S. shareholders are subject to a 10% withholding tax unless Nextel Mexico
chooses to pay the Mexican corporate income tax on the net earnings from which
the dividends are being paid. Interest paid by Nextel Mexico to U.S. residents
is subject to a 10% withholding tax.
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ARGENTINA
OPERATING COMPANY OVERVIEW. Nextel Argentina has 240 SMR channels (12 MHz)
in Buenos Aires, 200 SMR channels (10 MHz) in each of Cordoba, Rosario and
Mendoza and an additional 20 SMR channels in each of Mar del Plata and Tucuman.
The Company believes its channel position will allow Nextel Argentina to compete
effectively with other wireless communications providers. Nextel Argentina also
operates a paging business and offers paging services in Buenos Aires and Mar
del Plata under a nationwide paging license.
In February 1997, Nextel Argentina launched commercial analog SMR service
in Buenos Aires. In the second quarter of 1997, the company began offering
commercial analog SMR service in Cordoba and Rosario. As of December 31, 1997,
Nextel Argentina provided service to approximately 12,000 analog SMR subscriber
units and 4,000 paging subscriber units.
Nextel Argentina plans to construct an ESMR network in Buenos Aires,
Cordoba, Rosario and Mendoza utilizing Motorola's iDEN technology. The Company
currently plans to launch its commercial ESMR service in Buenos Aires in the
second quarter of 1998. While migrating its analog SMR customers to the digital
ESMR network, the company plans to operate parallel digital and analog networks.
As part of the migration process, the company will encourage its higher usage
customers to convert to the digital ESMR network so they can benefit from the
broader range of service offerings. The company's ESMR network service offerings
will include interconnect services and dispatch radio and paging, using one
multi-functional handset. Initially, the company will target the mobile
workforce, which it believes will be the most likely users of its ESMR network's
integrated service offerings.
Nextel Argentina is headquartered in Buenos Aires. As of December 31, 1997,
Nextel Argentina had 152 employees.
MARKETING. Nextel Argentina currently offers analog SMR dispatch and
interconnect service utilizing both Motorola and Ericsson equipment. Service
offerings include private call, call alert and scanning. The company
differentiates itself from other analog SMR providers by providing extensive
service coverage and maintaining a high level of customer service. The company
has a centralized customer service and installation center located in Buenos
Aires.
Nextel Argentina's analog SMR service is designed to be a business tool for
the mobile workforce in its Argentine markets. The company focuses its marketing
efforts on businesses that have a need for mobile communications, such as
trucking and transportation companies, real estate firms, construction
companies, suppliers and distributors and security companies. Nextel Argentina
is in the process of developing a distribution network and believes a strong
direct sales force is essential to reaching potential business customers. At
December 31, 1997, the company had a direct sales force consisting of 37 sales
representatives. In addition, the company has contracted with independent
dealers to market Nextel Argentina's products and is providing extensive
training to each of its distribution channels in order to ensure a high level of
customer satisfaction.
COMPETITION. The two largest SMR providers in Argentina, as measured by
subscribers, are owned by Movicom (a joint venture that includes BellSouth
Corporation and Motorola) and Miniphone S.A. ("Miniphone") (a joint venture
among the two Argentine telephone companies, Telefonica de Argentina S.A. and
Telecom Argentina STET-France Telecom S.A.) and operate under the tradenames
"Movilink" and "Starcom," respectively. Movicom owns 100 SMR channels in Buenos
Aires and 40 SMR channels in each of the three other major cities. In addition
to operating various SMR networks, Movicom also operates an iDEN system in
Buenos Aires. Movicom's iDEN-based digital ESMR system utilizes the
higher-capacity, "first-generation" voice algorithm system. Starcom owns and
operates 60 channels in Buenos Aires and additional SMR channels in two other
major cities. There are two cellular service providers in each of the major
markets in Argentina. In Buenos Aires, the two service providers are Movicom and
Miniphone. In 1996, over 425,000, or 64%, of Argentina's cellular subscribers
were located in Buenos Aires. In the northern region of Argentina, the two
cellular service providers are Compania de Telefonos del Interior S.A. ("CTI")
(a joint venture that includes GTE and Lucent Technologies, Inc.) and Telecom
Personal S.A. (a wholly owned subsidiary of
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Telecom Argentina STET-France Telecom S.A.). In the southern region of
Argentina, the two cellular service providers are CTI and Telefonica
Comunicaciones Personales S.A., a wholly owned subsidiary of Telefonica de
Argentina S.A., which operates under the name UNIFON.
The company expects additional competition following the auction of PCS
licenses, which has been temporarily postponed but is expected to occur during
1998.
REGULATORY AND LEGAL OVERVIEW. The Comision Nacional de Comunicaciones
("CNC") and the Argentine Secretary of Communications are the Argentine
telecommunications authorities responsible for administration and regulation of
the SMR industry.
CNC regulations require SMR operators to build out their channels within 12
months of the channel authorization issuance if the system is multi-site and to
guarantee their performance by posting a letter of credit equivalent to the
price paid in the spectrum auction. The letter of credit is released once the
installation and activation of the SMR site or sites have been verified by the
CNC. Nextel Argentina has built out its channels in a timely fashion and the
letters of credit posted by Nextel Argentina in connection with its prior
build-out obligations have expired and are not required to be replaced. In
December 1997, Nextel Argentina acquired an additional 60 SMR channels in Buenos
Aires in a public auction. Nextel Argentina posted a $12 million letter of
credit and is required to complete the build out of such channels within 12
months.
SMR licenses have an indefinite term, but are subject to revocation for
violation of applicable regulatory rules as discussed below. SMR service must
commence within six months to one year after receipt of the channel assignment
(depending on the type of network configuration). Failure to meet service or
loading requirements can result in revocation of the channel authorizations. The
CNC will revoke the licensee's license upon the finding of a third breach by a
licensee of service requirements. Licenses and channel authorizations may be
revoked for violation of other regulatory authority rules and regulations. All
SMR channel holders that received their channel authorizations pursuant to the
November 1995 SMR auction, including Nextel Argentina, were granted an extension
to December 1997 from the original December 1996 deadline to meet initial
loading requirements. The Company met the initial loading requirements in Buenos
Aires by the deadline and believes it will retain its rights to substantially
all of its licenses in its other Argentine markets. Argentina imposes no
limitation on foreign ownership of SMR licenses.
SMR providers are assured interconnection with the PSTN pursuant to the
terms of the tender rules under which the channels were awarded, as well as
pursuant to applicable laws. Furthermore, interconnection with the PSTN must be
on a nondiscriminatory basis. On February 2, 1998, Nextel Argentina executed an
interconnect agreement with Telefonica de Argentina S.A.
Under current law, Argentine currency is convertible into U.S. dollars
without restrictions, and Argentina has a free exchange market for all foreign
currency transactions.
Under applicable Argentine corporate law, dividends may be paid only from
liquid and realized profits as shown on the company's financial statements
prepared in accordance with Argentine generally accepted accounting principles.
Five percent of such profits must be set aside until a reserve equal to twenty
percent of the company's capital stock has been established. Subject to these
requirements, the balance of profits may be declared as dividends and paid in
cash pursuant to a majority vote of the shareholders. Under current law, there
is a 13.2% withholding tax on interest payments and no withholding taxes on
dividends.
PERU
OPERATING COMPANY OVERVIEW. Nextel Peru provides analog SMR services in
the greater Lima area under the tradenames "Dualcom" and "Mastercom." Nextel
Peru's subsidiaries have an aggregate of 138 SMR channels (6.9 MHz) in the
greater Lima area. As of December 31, 1997, Nextel Peru provided service to
approximately 3,000 analog SMR subscriber units.
Nextel Peru plans to construct an ESMR network in the greater Lima area
utilizing Motorola's iDEN technology and expects to launch commercial ESMR
service in 1999. Nextel Peru must file an application with the Ministry of
Transportation, Communications, Housing and Construction of Peru (the "Peruvian
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Ministry of Communications") to begin operation of ESMR services. Based upon the
current legal and regulatory framework, Nextel Peru expects such application to
be granted, although no assurance can be given. While migrating its analog SMR
customers to the digital network, the company intends to operate parallel
digital and analog SMR networks. As part of the migration process, the company
will encourage its higher-usage customers to convert to the digital network so
they can benefit from the broader range of service offerings. Digital service
offerings will include interconnect services, dispatch radio and paging using
one multi-functional handset. In order to begin offering data and paging
transmission services, Nextel Peru must apply for specific authorizations from
the Peruvian Ministry of Communications, which the Company expects will be
granted based on the current legal and regulatory framework, although no
assurance can be given. Initially, the company will target the mobile workforce,
which it believes will be the most likely users of iDEN's integrated service
offerings.
Nextel Peru is headquartered in Lima. As of December 31, 1997, Nextel
Peru's subsidiaries had an aggregate of 34 employees.
MARKETING. Nextel Peru offers its customers a broad range of services and
pricing plans designed to meet the specific needs of its customers. Nextel Peru
offers both dispatch only and integrated service plans (dispatch and
interconnect). These plans include sale or rental of various models of handsets.
The basic price package consists of a monthly fee and interconnect and dispatch
charges depending on minutes of use.
Nextel Peru's sales and marketing efforts focus primarily on providing
cost-effective local dispatch radio services to its target customers, which are
businesses such as trucking and transportation companies, manufacturing
companies, distributors and construction companies.
To establish brand identity, Nextel Peru plans to undertake a promotional
advertising campaign targeting the business segment of the market. In addition
to advertising, the company initially will rely heavily on its direct sales
force to educate potential customers on the benefits of using Nextel Peru's
services.
COMPETITION. The largest SMR provider in Peru, as measured by subscribers,
is Radio Trunking del Peru. Nextel Peru is the country's second largest SMR
provider. Tele 2000 and Telefonica del Peru are Peru's two cellular operators.
Telefonica del Peru (a joint venture between Telefonica Internacional of Spain
and Peruvian investors) provides nationwide coverage and operates under the
brand name "Moviline." Tele 2000 (a joint venture between BellSouth and Peruvian
investors) offers service in the greater Lima area, and recently established
nationwide roaming agreements with Telefonica del Peru. Tele 2000 operates under
the brand name "Celular2000."
PARTNER DESCRIPTION. The Company's partners in Nextel Peru are Motorola
International, which holds approximately 19.9%, and a Peruvian individual who
holds 10% of the capital stock of Nextel Peru.
REGULATORY AND LEGAL OVERVIEW. The Organismo Supervisor de Inversion
Privada en Telecomunicaciones ("OSIPTEL") and the Peruvian Ministry of
Communications regulate the telecommunications industry in Peru. OSIPTEL is
responsible for overseeing private investments in the telecommunications
industry and the Peruvian Ministry of Communications grants telecommunications
licenses and issues regulations governing the telecommunications industry. In
1994, the Peruvian government began to deregulate the telecommunications
industry in order to promote free and open competition for the provision of
telecommunications services. The Telecommunications Law of Peru (the "Peruvian
Telecommunications Law"), the general regulations thereunder (the "Peruvian
General Regulations") and the specific regulations governing trunking services
outline the rules for the operation of SMR services in Peru.
In Peru, SMR and paging service providers are granted licenses for
twenty-year terms, which may be extended for an additional 20-year term (subject
to compliance with the terms of the license). SMR and paging licenses may also
be revoked prior to expiration for violations of applicable regulatory rules as
discussed below. SMR and paging licensees must comply with a five-year minimum
expansion plan that sets forth the minimum loading requirements for the
licensees (the "Minimum Expansion Plan"). The Minimum Expansion Plan may be
amended at the licensee's request at the end of the first and second years of
the license terms if the licensee determines that market demand for its services
is insufficient for the licensee to meet the requirements of the Minimum
Expansion Plan. Failure to meet the Minimum Expansion Plan may result in
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revocation of the licenses. Licenses and channel authorizations may be revoked
for violation of other regulatory authority rules and regulations. Nextel Peru
failed to meet the Minimum Expansion Plan for 1997, but it has filed requests
for modification of such Minimum Expansion Plan for the licenses in question. To
date, Nextel Peru has not received a response from the Peruvian Ministry of
Communications with regard to its requests for modification.
Pursuant to the Peruvian General Regulations, all wireless
telecommunications licensees have the right to interconnect to the PSTNs.
Furthermore, interconnection with the PSTN must be on an equal and
nondiscriminatory basis and the terms and conditions of interconnect agreements
must be negotiated in good faith between the parties in accordance with the
interconnect regulations and procedures issued by OSIPTEL. Nextel Peru intends
to begin negotiating interconnect agreements with the applicable parties later
in 1998. Peru imposes no limitation on foreign ownership of SMR or paging
licenses or licensees.
Under current law, Peruvian currency is convertible into U.S. dollars
without restrictions, and Peru has a free exchange market for all foreign
currency transactions. Nextel Peru is currently negotiating a legal stability
agreement with the Peruvian government, which, among other things, would
guarantee free conversion of foreign currency for Nextel Peru and its
shareholders for a period of 10 years.
The payment and amount of dividends on the company's common stock is
subject to the approval of a majority of the shareholders at a mandatory meeting
of the shareholders of the company, as well as to the availability of earnings
to distribute determined in accordance with Peruvian GAAP. According to Peruvian
corporate law, interim dividends may be distributed subject to the prior
approval of the shareholders' meetings.
Available earnings are subject to the following priorities: (i) the
mandatory employee profit sharing of 10% of pre-tax profits and (ii) 10% of the
net profits must be allocated to a legal reserve, which is not further available
for use except to cover losses in the profit and loss statement. The latter
obligation remains until the legal reserve constitutes 20% of the capital stock.
After the legal reserve has been allocated, the shareholders at a shareholders'
meeting can then allocate any portion of the net profits to any special reserve.
The remaining amount of the net profits is available for distribution.
Dividends paid by Nextel Peru to its U.S. shareholders are not subject to
withholding tax and interest paid by Nextel Peru to U.S. residents is subject to
a 30% withholding tax.
Under Peruvian labor law, any telecommunications company with more than 20
employees is required to distribute among its employees 10% of its annual
pre-tax profits. Neither Nextel Peru nor any of its subsidiaries currently have
more than 20 employees.
PHILIPPINES
OPERATING COMPANY OVERVIEW. Nextel Philippines owns nationwide licenses
(with a total of 100 channels representing approximately 5 MHz), to provide SMR,
ESMR and paging services. Nextel Philippines commercially launched paging
services in February 1995 under the brand name "Infopage(TM)." Nextel
Philippines currently offers paging coverage across Metropolitan Manila and
Subic Bay. The company provided service to approximately 55,000 paging
subscriber units at December 31, 1997 and was the third largest paging company
in the country.
Nextel Philippines has a nationwide SMR license and is currently
constructing a digital ESMR network utilizing Motorola's iDEN technology. Nextel
Philippines plans to launch commercial ESMR service in Metropolitan Manila
during the third quarter of 1998.
Nextel Philippines is headquartered in Metropolitan Manila. As of December
31, 1997, Nextel Philippines had 915 employees of which 560 were operators
serving its paging customers.
MARKETING. Nextel Philippines offers both alphanumeric and numeric paging
services utilizing Motorola's FLEX technology and differentiates itself from its
competitors by offering a variety of value-added services including secretarial
services, voice mail, call forwarding, fax mail and group call. Moreover, the
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company places considerable emphasis on providing a high level of customer
service through its customer service center located at the company's
headquarters in Manila.
Paging services in the Philippines are targeted at both the business and
consumer segments. Nextel Philippines has developed a comprehensive and diverse
distribution network and believes that such a diverse distribution mix will
contribute to an increased growth in its subscriber base. In order to capture
the consumer segment and create brand awareness, Nextel Philippines has 14 owned
and operated retail outlets, primarily located within large shopping malls, that
exclusively carry the company's products. To target the business segment, the
company has a direct sales force of 80 people. Finally, the company has
contracted with five major dealers and 75 sub-dealers to market its Infopage
products.
Nextel Philippines' ESMR business will target the larger business customers
in its markets. The company will focus on building profitability rather than
building market share in a similar fashion to its efforts in its paging
business. Within the business segment, the company believes the mobile workforce
including construction, service, real estate and sales companies will be the
most likely users of the ESMR network's integrated service offerings.
Although the company intends to fully utilize its established paging
distribution network and leverage Infopage's brand recognition, the company also
intends to substantially augment its direct sales force in order to effectively
target other business customers. The company has begun to formulate a strategy
for its pricing plans and aims to charge a premium to low usage subscribers and
a slight discount to high usage subscribers while offering a significantly
greater number of services.
COMPETITION. There are two major SMR license holders in the Philippines,
each owning 100 channels nationwide, and 12 licensed paging operators. Nextel
Philippines believes that it is uniquely positioned to compete effectively in
the Philippines as a result of its nationwide SMR license and its fast-growing
paging business. There are currently five cellular providers with nationwide
licenses in the Philippines, two of which are AMPS operators, one of which is a
TACS operator and two of which are GSM operators. Pilipino Telephon Corporation
("Piltel"), the operator of the PSTN, is the largest cellular provider, with an
approximately 40% market share. As part of its effort to improve teledensity,
the government requires cellular providers to meet certain landline buildout
requirements, which require the installation of 400,000 telephone lines. This
represents a significant investment for each of these providers. See
"-- Regulatory and Legal Overview."
PARTNER DESCRIPTION. The Company's partners in Nextel Philippines
currently include affiliates of American International Group, Inc.
(collectively, "AIG"), which hold 10% of the outstanding shares of Nextel
Philippines, and the three Philippines Shareholders who hold the remaining 60%
of the capital stock of Nextel Philippines, including the Gotesco Group, which
owns a 20% interest in Nextel Philippines. AIG has notified the Company that it
has exercised its right to sell its 10% in Nextel Philippines back to the
Philippines shareholder from which it had originally purchased such interest.
The Company and the Philippine Shareholders have reached an agreement in
principle and are in the process of finalizing definitive documentation
regarding the Revised Corporate Structure and related matters. See "-- Post
Fiscal Year-End Transactions and Developments -- Philippines" and "-- Corporate
Governance -- Philippines."
REGULATORY AND LEGAL OVERVIEW. In the Philippines, the telecommunications
industry is principally governed by Republic Act No. 7925 (the "Telecoms Act")
enacted on March 1, 1995. Under the Telecoms Act, the National
Telecommunications Commission (the "Philippines National Commission"), an agency
under the Department of Transportation and Communications, is mandated to
regulate the telecommunications industry.
Engaging in telecommunications operations requires a franchise from the
Philippine Congress, which is the country's legislative body. After securing a
Congressional franchise, a franchise holder must apply to the Philippines
National Commission for an operating license called a Certificate of Public
Convenience and Necessity ("CPCN"). The grant of a CPCN goes through a process
of public notice and hearing. After receipt of an application for a CPCN for a
particular telecommunications service, and pending its legal,
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technical and financial evaluation through a public hearing, the Philippines
National Commission will initially issue a provisional authority ("PA"), which
serves as a temporary operating permit for the particular telecommunications
services applied for. Pursuant to the PA an applicant can commence construction
and commercial operations. Nextel Philippines has a PA authorizing it to operate
a nationwide digital trunked radio dispatch communications system. Nextel
Philippines' PA is subject to revocation for failure to (i) operate continuously
for two years or (ii) commence operations within two years of the issuance of
the PA. Under the terms of its PA, as amended, Nextel Philippines is required to
commence digital ESMR trunking services by January 20, 1999. The Company expects
to commence services in the third quarter of 1998.
The Telecoms Act provides that a telecommunications entity with regulated
types of services must make a public offering of at least 30% of its aggregate
common stock within a period of five years from the effective date of the
Telecoms Act or the entity's first start of commercial operations, whichever
occurs later. Accordingly, Nextel Philippines is mandated to make a public
offering of 30% of its common stock by March 1, 2000.
Under Philippine law, foreign entities' direct ownership of a public
utility telecommunications company is limited to 40% of the company's capital
stock (the "40% Rule"). Philippine law also limits the participation of foreign
investors in the governing body of any public utility enterprise to their
proportionate share in its capital. Therefore, a foreign investor's
participation in the management of a telecommunications company is limited
solely to membership on its board of directors and committees of the board of
directors, including but not limited to the executive committee. Accordingly,
all the executive and managing officers (e.g., president, chief executive
officer, treasurer) are required to be citizens of the Philippines.
Presidential Executive Order No. 59 (1993) prescribes, as a matter of
national policy, the compulsory and nondiscriminatory interconnection of
authorized public telecommunications carriers. Interconnection is negotiated and
effected through bilateral negotiations between the parties involved subject to
certain technical/operational and traffic settlement rules of the Philippines
National Commission. Nextel Philippines is discussing an interconnection
agreement with Piltel.
Presidential Executive Order No. 109 Series of 1993, and, subsequently, the
Telecoms Act (as implemented by the Philippines National Commission's Memorandum
Circular No. 8-9-25) require cellular mobile operators to install at least
400,000 local exchange lines. The Company does not believe that Nextel
Philippines is subject to such requirement, however, there can be no assurance
that this will be the case. If this requirement were found to be applicable to
Nextel Philippines, it would require a significant capital investment.
Under current regulations of the Central Bank of the Philippines (the
"Central Bank"), foreign exchange may be freely sold and purchased outside the
Philippine banking system. Restrictions exist on the sale and purchase of
foreign exchange in the banking system. The Philippine monetary authority, with
the approval of the President of the Philippines, has the statutory authority,
during a foreign exchange crisis or in times of national emergency, to
temporarily suspend or restrict sales of foreign exchange, require licensing of
foreign exchange transactions or require delivery of foreign exchange in the
Central Bank or its designee.
Foreign investments need not be registered with the Central Bank. The
registration of a foreign investment with the Central Bank is only required if
the foreign exchange needed to service the repatriation and the remittance of
capital and dividends are to be sourced from the Philippine banking system.
Nevertheless, even without Central Bank registration, foreign exchange needed
for capital repatriation and remittance of dividends of unregistered investments
can be sourced lawfully outside of the Philippine banking system. The Company's
investment in 30% of the equity of Nextel Philippines has been registered with
the Central Bank.
Under current law there is a 15% withholding tax on dividends and a 20%
withholding tax on interest payments.
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CANADA
OPERATING COMPANY OVERVIEW. The Company currently owns 583,104 Class A
Common Shares and 7,790,741 Class D Common Shares of Clearnet (each of which
Class D Common Share is convertible at the option of the holder into one Class A
Common Share). Clearnet is the largest SMR operator in Canada as measured by the
number of current subscribers, the number of 800 MHz channels and the population
of its service territory. As of December 31, 1997, Clearnet provided analog SMR
services in over 40 cities across Canada to approximately 56,000 subscriber
units and ESMR services in Ontario and Quebec to approximately 45,000 subscriber
units. Additionally Clearnet holds one of the two national 30 MHz licenses to
provide PCS in Canada. Clearnet launched PCS services in Canada's largest urban
centers in October 1997 and as of December 31, 1997, had approximately 50,000
PCS subscribers. The Company has two representatives on Clearnet's board of
directors. Clearnet files periodic and other reports with the Commission
pursuant to the requirements of the Exchange Act. More detailed and specific
information concerning Clearnet and information regarding the Company's rights
to representation on the Clearnet Board of Directors is contained in such
Exchange Act reports.
SHANGHAI, PEOPLE'S REPUBLIC OF CHINA
OPERATING COMPANY OVERVIEW. The Shanghai GSM System is a cooperative
project established by China United Telecommunications, Ltd. ("Unicom") and
Shanghai Science Technology Investment Corp. Ltd. ("SSTIC") to construct and
operate a GSM cellular network in Shanghai. The Shanghai GSM System has grown
quickly since the commencement of commercial operations in July 1995 and as of
December 31, 1997 reported that it had approximately 66,000 subscribers. The
current network has 93 cell sites covering the greater Shanghai region
(including the Pudong New Area). Under the current laws of the People's Republic
of China, foreign investors are not permitted to be involved directly in the
ownership or operation of telecommunications services. In the event that such
laws change, the Company may seek to convert its contractual right to share
profits generated by the Shanghai GSM System to a direct ownership interest,
although there can be no assurance that this would be possible.
In August 1995, the Company formed a joint venture with SSTIC pursuant to
which the Company provided financial support to the Shanghai GSM System for
construction of the initial phases of the system in exchange for a contractual
right to share profits from the system with SSTIC. The Company also provides
advice and direction to the Shanghai GSM System in the key areas of engineering,
customer care, billing practices, quality assurance and system performance.
Shanghai McCaw was renamed Shanghai CCT McCaw following the admission of CCT as
a new shareholder to the joint venture in November 1997.
In December 1997, CCT acquired a 51% ownership interest in Shanghai CCT
McCaw, in which the Company had a 60% equity interest, in exchange for
approximately $46 million of investments in the forms of equity, shareholder
loans, shareholder guarantees and fees. CCT's 51% interest represents the right
to receive 20.5% of the profits generated by the Shanghai GSM System. CCT's
proposed investment in Shanghai CCT McCaw received the necessary governmental
approvals, whereupon a new business license reflecting CCT's admission as a new
shareholder of Shanghai CCT McCaw and the change of the name to Shanghai CCT
McCaw, was issued. In consideration for its admission as a shareholder of
Shanghai CCT McCaw, CCT agreed to provide the funds necessary to enable Shanghai
CCT McCaw to meet its funding obligations with respect to the expansion of the
Shanghai GSM system (the "Phase III Expansion"). As a result of CCT's
acquisition of a 51% ownership interest in Shanghai CCT McCaw, the Company's
ownership interest in Shanghai CCT McCaw was diluted from 60% to 30% and the
Company's contractual rights to the profits generated by the Shanghai GSM System
was diluted from 25.2% to 12.1%.
Shanghai CCT McCaw currently employs six people all of whom are local
Chinese. CCT has appointed the General Manager of Shanghai CCT McCaw, who is
seconded by CCT to Shanghai CCT McCaw and remains on the payroll of CCT.
COMPETITION. There are only two authorized cellular providers in Shanghai,
Unicom and the Shanghai PTA (the local branch of the Ministry of Post and
Telecommunications (the "MPT")). The Shanghai PTA has been in operation since
1989 and operates three cellular networks (two TACS systems and one GSM system).
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PARTNER DESCRIPTION. Unicom was established in 1994 by the Ministry of
Electronics Industry, the Ministry of Railways, the Ministry of Power and 13
other shareholders, including SSTIC. SSTIC is an investment holding company
established for the purpose of developing the Shanghai high-technology industry.
SSTIC was formed by the Municipal Government of Shanghai, six major Shanghai
banks as well as two major diversified Shanghai conglomerates. SSTIC is also a
shareholder of Unicom.
CCT is the Company's other partner in Shanghai CCT McCaw. CCT is CCT
Telecom's holding company for its domestic telecommunications business in China.
Its investments include a communications project in Guangzhou and a second GSM
project in Shanxi province.
REGULATORY AND LEGAL OVERVIEW. Until 1994, the MPT was the sole entity
authorized to provide public telecommunications services in China. In July 1994,
the State Council established Unicom with the authority to provide public
telecommunications services. In addition, pursuant to a 1995 agreement the MPT
and the Peoples Liberation Army (the "PLA") agreed to jointly develop 800 MHz
cellular communications networks to provide wireless communications services to
the public using spectrum originally allocated to the PLA for military
communications use. Accordingly, there are three entities in China authorized to
provide cellular telecommunications services to the public. The MPT continues in
its role as the central government's regulatory authority over the
telecommunications sector.
Under current Chinese law, foreign investors are not permitted to be
involved directly in the ownership or operation of telecommunications services.
Pursuant to the current PRC Regulation on Foreign Exchange Control,
Renminbi, the currency of China, is freely convertible under current account,
however, it is not freely convertible under capital account. A foreign invested
enterprise is permitted to convert its Renminbi earnings to foreign currencies
for the purpose of enabling the foreign investors to receive dividends and
interest payments. Conversion of Renminbi to foreign currencies for the purpose
of repatriating foreign investors' capital contributions to, and principal
payments from, a foreign invested enterprise is subject to approval by relevant
government authorities, which approval will be granted upon showing that the
foreign invested enterprise has been lawfully terminated and dissolved or the
loan has been properly registered, as the case may be. The company's loan to
Shanghai CCT McCaw has been registered with the relevant governmental authority.
Under current law there is a 10% withholding tax on interest payments and no
withholding tax on dividends paid to foreign investors out of the foreign
invested enterprise.
CORPORATE GOVERNANCE
As of December 31, 1997, Nextel International owned 100% of its Operating
Companies in Mexico and Argentina. The following is a description of the
Company's contractual relationships with its partners in the other Operating
Companies.
BRAZIL. The Company owns 81% of the capital stock of Nextel Brazil, which
entitles it to 90% of the voting rights. The Company, therefore, has the right
to make management and operating decisions of Nextel Brazil. The Telcom Group
owns 19% of the capital stock, which entitles it to 10% of the voting rights.
The Telcom Group has the right to designate candidates representing at least 10%
of the directors of Nextel Brazil, but at least one candidate so long as the
Telcom Group owns at least 10% of Nextel Brazil. The Telcom Group holds veto
rights with respect to the following actions: (i) amending the articles of
incorporation or bylaws of Nextel Brazil; (ii) creating any equity senior to the
existing shares of Nextel Brazil or changing or adversely affecting any
provisions or rights of the existing shares of Nextel Brazil; (iii) permitting
or causing Nextel Brazil or any of its material subsidiaries to issue voting
securities with voting rights different from those to which then-issued
securities are entitled; (iv) entering into a merger, a sale of substantially
all of the assets, a dissolution, a liquidation or a spin-off of Nextel Brazil
or any of its material subsidiaries; (v) permitting Nextel Brazil or any of its
subsidiaries to enter into a material contract with the Company or its
affiliates other than on an arm's-length, fair-market-value basis; or (vi)
permitting Nextel Brazil or any of its affiliates to issue or dispose of
securities of the company other than for cash at fair market value. If the
Telcom Group exercises its veto rights, Nextel Brazil has the right to purchase
(upon vote of a simple majority of its board of directors) all of the Telcom
Group's shares of Nextel Brazil then-owned by them at their appraised fair
market value. The repurchase price can be paid in cash or in shares of Nextel
Communications common stock
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or a combination thereof. Nextel Brazil has the right to declare dividends
without the approval of the Telcom Group.
The Telcom Group has the right to defer making its pro rata share of any
capital calls that may arise until April 1999 without suffering any dilution of
its right to receive dividends and other cash or noncash distributions;
provided, however, that the failure by the Telcom Group to ultimately make such
capital contributions (and interest thereon) by April 1999 will result in the
proportionate dilution of its economic interest in Nextel Brazil. The Telcom
Group has the right at any time between October 31, 2001 and November 1, 2003,
or at any time after a change of control of Nextel Brazil, to require Nextel
Brazil to redeem the Telcom Group's entire interest at its appraised fair market
value. The redemption price is payable in cash, or, at Nextel Brazil's election,
publicly traded common stock of any entity owning 50% or more of Nextel Brazil
or a combination thereof. In the event that Nextel Brazil issues additional
shares of its common stock to such a third party and, as a result, the Telcom
Group's interest in Nextel Brazil is reduced to less than 17%, the Telcom Group
has the right to purchase additional shares in Nextel Brazil such that after the
issuance to a third party, the Telcom Group would own no more than 17% of the
outstanding common stock.
The Company has a right of first refusal with respect to proposed transfers
by members of the Telcom Group of their respective interests in Nextel Brazil
and has the right to compel the Telcom Group to join in any proposed transfer by
the Company of its entire interest in Nextel Brazil. The Telcom Group has the
right to join in any proposed transfer by the Company of its entire interest in
Nextel Brazil.
Nextel Brazil is the owner of 95% of the share capital of Nextel S.A. in
the form of Nextel S.A. Class A Common Stock. In September 1997, the Company
sold 5% of Nextel S.A. to Motorola International in the form of Nextel S.A.
Class B Common Stock. Except for the veto rights of the Telcom Group described
above and except for the restrictions described below, the Company has the right
to make management and operating decisions of Nextel S.A. Nextel Brazil has a
right of first refusal with respect to transfers of Nextel S.A. capital stock by
any other shareholder of Nextel S.A. Each shareholder of Nextel S.A., other than
Nextel Brazil, has the right to include all, but not less than all, of such
shareholder's shares in any transfer by Nextel Brazil to a third party. If the
Company transfers control of Nextel Brazil, the Company is obligated to ensure
that all other shareholders of Nextel S.A. are provided the right to receive
economic benefits comparable to those described in the previous sentence. Nextel
Brazil has the right to cause the other shareholders of Nextel Brazil to sell
their shares if Nextel Brazil transfers its entire interest in Nextel S.A.
PERU. The Company owns 70.05% of the capital stock of Nextel Peru,
Motorola International owns 19.95% and a corporation controlled by Oscar
Benalcazar Coz, a Peruvian citizen, owns 10%. As long as the Company controls
Nextel Peru, the Company will have the right to designate for election five
members of the seven-member board of directors of Nextel Peru. If the Company's
equity interest in Nextel Peru is 60.05% or less at any time, however, the
Company will have the right to designate for election four of the seven members
of the Nextel Peru board of directors. Each shareholder of 10% or more of the
outstanding shares of Nextel Peru has a right to designate one of the seven
members of Nextel Peru's board of directors. If any shareholder fails to
maintain at least a 10% ownership interest in Nextel Peru, the directors
designated for election by such shareholder will be required to resign.
The following actions require the approval of at least five members of the
board of directors of Nextel Peru (including each of the directors designated by
each shareholder holding at least 19% of the outstanding shares of Nextel Peru):
(i) participation in and approval of the selection of the senior management of
Nextel Peru (which approval shall not be unreasonably withheld); (ii) adoption
or amendment of any three-year business plan and budget; and (iii) approval of
any expenditures for any year that would cause free cash flow for such year to
be more than 15% less than the amount approved in the business plan for such
year. In addition, the following actions must be approved by an absolute
majority of the outstanding shares at a shareholders' meeting having a quorum of
at least 83% of the outstanding shares: (i) increasing or decreasing the
authorized share capital of Nextel Peru; (ii) issuing debentures; (iii) entering
into a merger, or sale of substantially all of the assets of Nextel Peru; or
(iv) dissolving, liquidating or winding-up of Nextel Peru.
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Each shareholder of 5% or more of the outstanding shares of Nextel Peru has
a right of first refusal with respect to transfers by the other shareholders.
The other shareholders have the right to join in any proposed transfer by the
Company of its controlling interest in Nextel Peru. The Company has the right to
cause the other shareholders of Nextel Peru to join in any proposed transfer of
all of the outstanding shares of Nextel Peru. Nextel Peru may not transfer any
shares of capital stock of its subsidiaries without the prior written consent of
each holder of 15% or more of the outstanding shares of Nextel Peru.
Until July 29, 1998, the Company may transfer up to 20% of the outstanding
shares of Nextel Peru to a new Peruvian partner without regard to the transfer
restrictions described above, subject to certain conditions. If a new Peruvian
partner does not purchase any or all of such 20% of the outstanding shares of
Nextel Peru, the Company may sell to Motorola or its affiliates, by written
notice delivered to Motorola within 30 days of July 29, 1998, and Motorola and
its affiliates have agreed to purchase up to 10% of the outstanding shares of
Nextel Peru at a price equal to the Company's cost for such shares plus interest
of 7% per annum.
If Nextel Peru makes a capital call on its shareholders and a shareholder
fails to make a required capital contribution, subject to certain conditions,
(i) the director or directors nominated by such shareholder will be required to
resign, (ii) the other shareholders may make all or any part of such capital
contribution and receive shares of Nextel Peru in exchange and (iii) the other
shareholders may purchase, or Nextel Peru may redeem, all or any of the shares
of Nextel Peru owned by such shareholder. If any shareholder materially breaches
any provision of the Shareholders Agreement dated as of January 29, 1998, by and
among Nextel Peru and the shareholders of Nextel Peru, the other shareholders
have the right to purchase any or all of the shares of Nextel Peru owned by such
shareholder at a value based on total paid-in capital, if the breach occurs
prior to January 29, 2000, and at 75% of appraised fair market value thereafter.
Motorola has the right to cause Nextel Peru to acquire all shares of Nextel
Peru held by Motorola and its affiliates at the appraised fair market value of
such shares if Motorola owns at least 19% of the outstanding shares of Nextel
Peru and Nextel Peru does not purchase ESMR infrastructure equipment from
Motorola; provided that such ESMR infrastructure equipment is technologically
competitive and is offered to Nextel Peru on competitive commercial terms.
PHILIPPINES. The Company owns 30% of the outstanding shares of Nextel
Philippines and has the right to designate three of 11 members of the board of
directors and one of five members of the executive committee of the board.
Pursuant to the Revised Corporate Structure, the Company holds veto rights with
respect to decisions involving a number of significant corporate actions
including the following: (i) the acquisition of any entity; (ii) the merger;
consolidation or sale of the company or any subsidiary or any disposition of a
material amount of assets; (iii) the amendment of the articles of incorporation
or by-laws; (iv) any amendment affecting the preemptive rights of stockholders;
(v) appointment and removal of the President and Secretary; (vi) approval of or
amendment to the annual business plan; (vii) entering other lines of business;
(viii) issuances of stock; (ix) the approval of annual operating and capital
budgets; (x) any borrowings in excess of $200,000; (xi) any transactions with
affiliates in excess of $200,000; (xii) any dispositions of assets or making
loans other than in the ordinary course of business; (xiii) appointment and
removal of the chief executive officer and chief financial officer of Nextel
Philippines; (xiv) election of members of the executive committee; (xv) filling
of vacancies of the board of directors for causes other than removal or
expiration of term; and (xvi) decisions of the executive committee of the board.
The presence of the member nominated by the Company is required to satisfy the
quorum requirement for meetings of the executive committee.
In February 1998, the Company and the Philippine Shareholders reached an
agreement in principle, and are in the process of finalizing definitive
documentation that would (i)implement the Revised Corporate Structure; (ii)
provide for purchase by the Company of existing shareholder loans of the
Philippines Shareholders totaling approximately $19.6 million ($2.0 million of
which the Company has already purchased), which loans, upon purchase by the
Company, bear interest at 18% per annum and will be convertible into equity of
Nextel Philippines; (iii) provide for the funding by the Company of Nextel
Philippines' future capital needs, currently estimated to be $50 million for
1998, pursuant to loans which could, at the option of the Company, be converted
into equity in Nextel Philippines; (iv) provide the Gotesco
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Group with the right to put its 20% interest to the Company for approximately
$9.4 million, beginning on the date which is nine months after the closing of
the Philippines Partner Agreement; and (v) provide the Company with the right to
purchase the Gotesco Group's 20% interest for approximately $11.6 million, if
the Gotesco Group does not exercise its put. The ability of the Company to
convert shareholder loans into equity, satisfy the Gotesco put or call the
Gotesco Group's 20% interest is subject to applicable Philippines foreign
ownership rules. The Revised Corporate Structure has been approved by the
stockholders and board of directors of Nextel Philippines and has become
effective, subject to automatic reversion to the preexisting corporate structure
in the event that the Philippine Partner Agreement is not finalized and/or the
transactions provided for therein are not consummated by March 31, 1998. No
assurance can be given that the Company will be able to consummate such
transactions and the failure to consummate such transactions may have a material
adverse effect on Nextel Philippines.
Nextel Philippines and the Company have entered into a technical services
agreement pursuant to which the Company agreed to provide Nextel Philippines
with engineering and other technical services, marketing assistance and system
operation assistance on a cost reimbursement basis. The agreement has an initial
term of three years. Nextel Philippines and the Company have agreed in principle
to restructure the technical services agreement into a secondment agreement upon
substantially the same financial terms and the revised agreement remains to be
reduced to definitive documentation.
SHANGHAI. Under current Chinese law, foreign entities or individuals are
prohibited from participating directly in the ownership and operation of
telecommunications services. Because of this limitation, the Company's interest
in the Shanghai GSM System is held through its 30% equity interest in a Chinese
equity joint venture, Shanghai CCT McCaw. Shanghai CCT McCaw participates in the
Shanghai GSM System through the Unicom Agreement originally between SSTIC, its
Chinese partner, and Unicom. SSTIC and CCT hold 19% and 51% equity interests in
Shanghai CCT McCaw, respectively.
Shanghai CCT McCaw participates in the Shanghai GSM System through a
profit-sharing arrangement under (i) the Shanghai Mobile Telecommunications GSM
Project Cooperation Contract, dated April 21, 1995 (the "Unicom Agreement"),
between Unicom and Shanghai Science Technology Investment Corp. Ltd. ("SSTIC"),
one of the Company's partners in Shanghai CCT McCaw and (ii) the China Unicom
Shanghai GSM Phase III Cooperation Agreement, dated March 29, 1997 (the "Phase
III Agreement"), between Shanghai CCT McCaw and Unicom, which modified the
arrangements under the Unicom Agreement. The Phase III Agreement requires
Shanghai CCT McCaw to provide 60% of the funds required for the "Phase III
Expansion", which is estimated by Shanghai CCT McCaw to be approximately $38
million. Pursuant to the Phase III Unicom Agreement Shanghai CCT McCaw has
agreed to provide 60% of the funds required to expand the capacity of the
Shanghai GSM System to provide service for an additional 100,000 subscribers.
Shanghai CCT McCaw's share of the funds is estimated to be equal to
approximately RMB 386.4 million (approximately $46 million). Pursuant to the
Phase III Unicom Agreement, since September 15, 1997, Shanghai CCT McCaw has
received 40.2% of the profits of the Shanghai GSM System. The Phase III Unicom
Agreement expires January 15, 2012.
Pursuant to a joint venture agreement and other agreements entered into
between the Company, CCT and SSTIC, membership of the nine person board of
directors of Shanghai CCT McCaw is allocated as follows: (i) five directors are
appointed by CCT Telecom, (ii) two directors appointed by SSTIC; and (iii) two
directors appointed by the Company. Certain significant corporate actions
require unanimous approval of the board of directors, including: (i) an
amendment to the articles of association; (ii) changes in the ratio of the
partners' capital contribution; and (iii) the merger or dissolution of Shanghai
CCT McCaw. Certain other matters require the approval of at least five members
of the board of directors (including approval of at least one director appointed
by each shareholder). Those matters include the following: (i) allowing a third
party to participate in the ownership of Shanghai CCT McCaw; (ii) certain
changes to capitalization; (iii) borrowing money; (iv) paying dividends; (v)
approving operating and capital budgets; (vi) changing the management structure;
(vii) entering into transactions with affiliates; (viii) the purchase and sale
of capital equipment; and (ix) any action not in the ordinary course of business
of Shanghai CCT McCaw. None of the parties is permitted to sell its interest in
Shanghai CCT McCaw without the consent of the other two parties.
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In addition to its capital contribution, the Company was responsible for
providing a $13.2 million to fund the Shanghai GSM System (the "Shanghai Loan").
As of December 31, 1997, the outstanding balance of the Shanghai Loan (after
repayments of principal by Shanghai CCT McCaw) was $11.3 million. The Company
may be required to increase the Shanghai Loan by approximately $400,000.
In addition to its capital contribution, CCT agreed to provide to Shanghai
CCT McCaw (i) a loan of $13.2 million (the "CCT Loan") and (ii) an additional
loan of up to $3 million to cover cost overruns for Phase III Expansion required
to be borne by Shanghai CCT McCaw (the "CCT Additional Loan"). CCT and Shanghai
CCT McCaw have agreed that CCT may not accept any payment of principal or
interest in respect of the CCT Loan or the CCT Additional Loan during any period
when Shanghai CCT McCaw is in default under the Shanghai Loan.
1998 PLAN
The net proceeds to the Company from the March 1998 Offering were
approximately $387 million, after deducting discounts and commissions and other
expenses payable by the Company. The March 1998 Offering is part of the
Company's 1998 Plan. See "-- Post Fiscal Year-End Transactions and
Developments." Nextel International's expected funding sources and uses with
respect to the 1998 Plan are described below:
<TABLE>
<CAPTION>
SOURCES
- --------------------------------------------
(IN MILLIONS)
<S> <C>
Gross proceeds from the March 1998
Offering........................ $401
Available cash, cash equivalents
and marketable securities at
December 31, 1997............... 259(2)
Operating Company vendor and bank
financings...................... 150(4)
----
Total........................ $810
====
</TABLE>
<TABLE>
<CAPTION>
(IN MILLIONS)
USES(1)
- --------------------------------------------
<S> <C>
System and related capital
expenditures.................... $449
Cash used by operating activities,
financing fees and other
corporate purposes.............. 203(3)
Pending or potential acquisitions
of licenses and investments..... 81(5)
Completed acquisitions and
investments..................... 68(6)
Contingent liabilities............ 9(7)
----
Total........................ $810
====
</TABLE>
- ---------------
(1) Reflects the Company's anticipated share of the Operating Companies' capital
expenses and other funding uses.
(2) Excludes cash held at the Operating Company level and includes $69 million
of cash held by the Company which is restricted for use as equity
investments under the Company's financing agreements and equipment purchases
under certain infrastructure purchase contracts.
(3) Includes interest expense related to the existing Motorola vendor financing
arrangements and the Argentina Credit Facility.
(4) Includes approximately $80 million assumed to be drawn during 1998 under the
Argentina Credit Facility and the remaining $75 million (of which the
Company's allocated share is approximately $70 million) assumed to be drawn
during 1998 under the Brazil Motorola Financing.
(5) Represents amounts budgeted for pending or potential SMR license purchases
and investments in new markets, including the Japan Acquisition. Also
includes $19.6 million expected to be used to purchase Philippines
Shareholders' loans.
(6) Includes $46 million for the acquisition of the remaining 50% equity
interest in Nextel Argentina on January 30, 1998 and $22 million
representing the final payment for the remaining equity interest in Nextel
Mexico.
(7) Reflects the $9 million contingent liability for the put right relating to
Nextel Philippines, which is exercisable during 1998.
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<PAGE> 33
PHILIPPINES MOTOROLA FINANCING. In June 1997, Nextel Philippines and
Motorola entered into an equipment financing agreement (the "Philippines
Motorola Financing"), pursuant to which Motorola committed to provide a maximum
amount of $14.7 million of vendor financing to Nextel Philippines. As of
December 31, 1997, all of the $14.7 million had been borrowed under the
Philippine Motorola Financing.
BRAZIL MOTOROLA FINANCING. In October 1997, Nextel Brazil and Motorola
Credit entered into an equipment financing agreement whereby Motorola Credit
agreed to provide up to $125 million in term loans to Nextel Brazil (the "Brazil
Motorola Financing"). The Brazil Motorola Financing is repayable in semiannual
installments over a period of 42 months commencing June 30, 2000 and bears
interest at an annual rate periodically determined by the Company at either
LIBOR plus 4.63% or the prime rate plus 2.5%. As of December 31, 1997
approximately $50.3 million had been drawn, and the remaining $74.7 million was
available for future borrowings, under the Brazil Motorola Financing.
ARGENTINA CREDIT FACILITY. As of February 27, 1998, Nextel Argentina
entered into the Argentina Credit Facility, which provides for an $83 million
senior secured credit facility. Borrowings under the Argentina Credit Facility
are subject to finalizing certain security arrangements as well as the
satisfaction or waiver of certain other conditions. Loans under the Argentina
Credit Facility will bear interest at a rate equal to either (i) the ABR plus
2.75% (ABR is the highest of the prime rate, the base CD rate plus 1% and the
federal funds rate plus 0.5%) or (ii) the Eurodollar rate plus 3.75% (the
Eurodollar rate is the LIBO rate multiplied by the statutory reserve rate). The
loans under the Argentina Credit Facility will be repaid in quarterly
installments beginning September 30, 2000 and ending March 31, 2003.
The existing committed secured equipment financing facilities obtained from
Motorola and any additional financing arrangements obtained from Motorola under
the Motorola MOU (as defined herein) are referred to herein collectively as the
"Motorola Financings."
For a more detailed description of the Philippines Motorola Financing,
Brazil Motorola Financing and Argentina Credit Facility, see Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Bank and Vendor Financing."
The Company believes that the sources described above will provide funds
that in the aggregate are expected to be sufficient to implement the 1998 Plan
including all currently anticipated cash needs of its business activities
through 1998; however, there can be no assurance that such funds will be
sufficient. If, among other things, Nextel International's plans change, its
assumptions prove inaccurate or the net proceeds from the March 1998 Offering,
together with any other funds available to the Company and the Operating
Companies or any other borrowings otherwise prove to be insufficient to meet
such cash needs through 1998, the Company may be required to seek additional
capital sooner than anticipated. See "-- Risk Factors -- Significant Capital
Requirements for Operations" and "-- Forward-Looking Statements." Certain of the
funds received by the Company from the issuance of the March 1998 Notes have
been allocated for particular uses and may not be generally available to meet
other funding needs of the Company. The availability of borrowings under the
existing Motorola Financings and the Argentina Credit Facility are subject to
the satisfaction or waiver of certain conditions. See Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Bank and Vendor Financing."
The Company will also require significant additional capital in years
subsequent to 1998 to fund the further build-out, expansion and enhancement of
its ESMR networks, to fund operating losses and for other purposes. To the
extent the Company's then existing financing sources are insufficient to meet
such needs, the Company may seek to raise such additional capital from public or
private equity or debt sources. There can be no assurance that the Company will
be able to raise such capital on satisfactory terms, if at all. See "-- Risk
Factors -- Significant Capital Requirements for Operations."
EMPLOYEES
As of December 31, 1997, the Company, at the corporate level, employed 35
employees and the Operating Companies (excluding Clearnet and the Shanghai GSM
System) had an aggregate of 1,627
33
<PAGE> 34
employees. The Company is not a party to any collective bargaining agreements
and the Company believes its relationship with its employees is good.
RISK FACTORS
The Company's business, financial condition and future prospects are
subject to a number of risks and contingencies. The risks and contingencies that
the Company regards currently as among the most significant are summarized
below. See also "-- Forward-Looking Statements."
SIGNIFICANT CAPITAL REQUIREMENTS FOR OPERATIONS. Expansion and upgrade of
the Company's existing wireless communications systems, development of the
Company's new ESMR networks systems and the continued funding of operating
losses will require substantial additional cash over the next several years. In
1998 the Company estimates that its funding requirements will be approximately
$810 million. The Company believes that the net proceeds from the March 1998
Offering, together with available cash, cash equivalents and marketable
securities (including proceeds remaining from the March 1997 Offering) and
borrowings expected to be available under the existing Motorola Financings and
the Argentina Credit Facility, will be sufficient to fund the Company's current
operations, including the planned expansion of its existing operations during
1998; however, there can be no assurance that such funds will be sufficient. If,
among other things, the Company's plans change, its assumptions regarding its
funding needs associated with the further build-out, expansion and enhancement
of its ESMR networks at the Operating Company level prove to be inaccurate, the
other shareholders in certain of the Operating Companies do not fund their
expected capital requirements, it consummates acquisitions or investments in
addition to those currently contemplated or at prices higher than currently
contemplated, it increases its existing equity ownership interests in certain of
the Operating Companies beyond those currently contemplated, it experiences
growth in its business or subscriber base greater than that which was
anticipated in developing the 1998 Plan, it experiences unanticipated costs or
competitive pressures, the relevant Operating Companies are unable to access
funds under the existing Motorola Financings and/or the Argentina Credit
Facility, or the net proceeds from the March 1998 Offering together with any
other funds available to the Company and the Operating Companies (including
proceeds remaining from the March 1997 Offering) or any other borrowings
otherwise prove to be insufficient to meet cash needs through 1998, the Company
may be required to seek additional capital sooner than currently anticipated.
The Company and certain of the Operating Companies can incur indebtedness only
in compliance with the terms of the covenants contained in the indentures
governing the March 1997 Notes and the March 1998 Notes (the "Existing
Indentures") and the availability of borrowings under the existing Motorola
Financings and the Argentina Credit Facility are subject to the satisfaction or
waiver of certain conditions. The Company will also require significant
additional capital in subsequent years to fund the further build-out, expansion
and enhancement of its ESMR networks, to fund operating losses and for other
purposes. To the extent the Company's then existing financing sources are
insufficient to meet such needs, the Company may seek to raise such additional
capital from public or private equity or debt sources. There can be no assurance
that the Company will be able to raise such capital on satisfactory terms, if at
all. Nextel Communications is not obligated to provide any additional funds to
the Company. If the Company decides and is able to raise additional funds
through the incurrence of debt, it may become subject to additional or more
restrictive financial covenants and its interest obligations will increase. In
the event that the Company is unable to obtain such additional capital or to
obtain it on acceptable terms, it may be required to reduce the scope of its
presently anticipated construction and expansion of its ESMR networks, which
could have a material adverse effect on its business, prospects and financial
condition. See "-- 1998 Plan."
CONTINGENT CAPITAL REQUIREMENTS. The Telcom Group, a group of shareholders
of Nextel Brazil, has the right between October 31, 2001 and November 1, 2003,
to require Nextel Brazil to redeem its 19% interest in Nextel Brazil (or
approximately 18% interest in Nextel S.A.) at fair market value as determined
pursuant to an appraisal procedure (the "Nextel Brazil Put"). Motorola has the
right to cause Nextel Peru to acquire all shares of Nextel Peru held by Motorola
and its affiliates (the "Nextel Peru Put") at the appraised fair market value of
such shares if Motorola owns at least 19% of the outstanding shares of Nextel
Peru and Nextel Peru does not purchase ESMR infrastructure equipment from
Motorola, provided that such ESMR infrastructure equipment is technologically
competitive and is offered to Nextel Peru on competitive
34
<PAGE> 35
commercial terms. Upon execution of the Philippine Partner Agreement, the
Gotesco Group, one of the Philippine Shareholders, will have the right (the
"Gotesco Put Right" and collectively with the Nextel Brazil Put and the Nextel
Peru Put, the "Operating Company Puts"), exercisable nine months after the
execution of the Philippine Partner Agreement, to put its 20% interest in Nextel
Philippines to the Company at a purchase price of approximately $9.4 million.
Additionally, the Company would be required to purchase approximately $17.6
million of the Philippines Shareholders' loans that remain outstanding following
execution of the Philippines Partner Agreement. The Company anticipates that it
would seek any required funding to meet any obligation under its Operating
Company Puts through the issuance of additional debt and equity securities at
the Company and such Operating Company's level, future equity investments in
such Operating Company by new local partners and capital contributions from
Nextel Communications in the form of cash or common stock of Nextel
Communications. Nextel Communications has no obligation to provide any such
financing in any form and there can be no assurance that the Company or any of
the Operating Companies will be successful in obtaining all of the amounts
required to fund the Operating Company Put obligations. The failure to fund any
Operating Company Put may have a material adverse effect on the Company. In
addition to the Operating Company Puts, the Company and certain Operating
Companies have certain deferred payment obligations that will mature during or
after 1998. Upon approval by Anatel, the Company intends to exercise its rights
under the Option Agreements and its option with respect to the remaining 51%
interest in MCS. The Company would be required to pay approximately $4.6 million
to exercise such options. Pursuant to a services agreement entered into between
Nextel Mexico and certain shareholders of Grupo Comunicaciones San Luis ("Grupo
San Luis"), in connection with the Company's purchase of Grupo San Luis' equity
interest in Nextel Mexico, Nextel Mexico has agreed to pay such shareholders
aggregate consulting fees of approximately $6.6 million in January 1999 as
consideration for regulatory advice and consulting services rendered to Nextel
Mexico. The Company is obligated to pay to Nextel Peru the remaining purchase
price of $20.9 for its equity interest in Nextel Peru. Additionally, in
connection with the Argentina Credit Facility, the Company has agreed to
contribute at least $50 million of additional capital in the form of cash or new
equipment to Nextel Argentina by December 31, 1999.
GOVERNMENT REGULATION. The licensing, construction, ownership and
operation of wireless communications systems, and the grant, maintenance and
renewal of applicable licenses and radio frequency allocations, are regulated by
governmental entities in the markets in which the Operating Companies conduct
business. In addition, such matters and certain other aspects of wireless
communications system operations, including rates charged to customers and the
resale of wireless communications services, may be subject to public utility
regulation in the jurisdiction in which service is provided. Further, statutes
and regulations in certain of the markets in which such Operating Companies
conduct business impose limitations on the ownership of telecommunications
companies by foreign entities. Changes in the current regulatory environments in
such countries, or future judicial intervention, including with respect to
interconnection arrangements, requirements for increased capital investments,
regulations affecting prices the Operating Companies are able to charge for
their services or foreign ownership limitations, could have a material adverse
effect on the Company. Because of the uncertainty as to the interpretation of
regulations in certain jurisdictions, there can be no assurance the Company can
provide planned services in each jurisdiction and it may be possible that the
Company may be prohibited from providing services it intends to provide in the
future in certain jurisdictions, including particularly its ESMR services. For a
more detailed description of the regulatory environment in each of the countries
in which the Operating Companies conduct business, see the "Regulatory and Legal
Overview" discussion for each Operating Company under "Business -- The Company's
Operations and Investments."
Wireless communications licenses and spectrum allocations are subject to
ongoing review and, in some cases, to modification or early termination for
failure to comply with applicable regulations. Most of the Company's wireless
communications licenses have fixed terms and are not automatically renewable. In
cases where license terms are fixed, there can be no assurance that license
renewal will be effected, or if effected that renewal will be on acceptable
economic terms.
COMPLIANCE WITH SYSTEM CONSTRUCTION, OPERATION OR LOADING
REQUIREMENTS. Compliance with the terms of the Operating Companies' licenses
and certain regulatory requirements, such as installation deadlines and minimum
loading requirements, can be difficult. There can be no assurance that such
requirements will be
35
<PAGE> 36
met or that the Company will not lose any applicable wireless communications
licenses as a result of its failure to meet such requirements. The Company
currently is not in compliance with applicable installation deadlines and
minimum loading requirements with respect to certain channels located in various
parts of Brazil outside Sao Paulo. The Company has not yet met minimum loading
requirements with respect to certain channels in some markets located in
Argentina outside of Buenos Aires. Nextel Peru has not satisfied its minimum
expansion plans for operation. Failure to get waivers, extensions or similar
relief of the relevant deadlines or to otherwise comply with such requirements
may result in revocation of the licenses affected.
In the Philippines, cellular mobile operators are required to install at
least 400,000 local exchange lines. The Company does not believe that Nextel
Philippines is subject to this requirement, however no assurance can be given
that this will be the case. If this requirement were found to be applicable to
Nextel Philippines, it would require a significant capital investment.
INTERCONNECT AGREEMENTS. Each of the jurisdictions in which the Operating
Companies operate permit wireless communications companies to interconnect to
the landline telephone service provider. Although interconnection services are
currently being provided to the Operating Companies for their analog SMR
services in Mexico and Peru, the Operating Companies in those countries have not
entered into definitive interconnect agreements with the landline telephone
service providers for their ESMR networks. The Company has entered into
interconnect agreements in Brazil, Argentina and the Philippines and is
currently negotiating interconnection agreements in connection with ESMR
services in Mexico. There can be no assurance that the Company will enter into a
satisfactory interconnect agreement for its digital networks in Mexico and Peru
and the failure to enter into interconnect agreements in these markets on
favorable terms could have a material adverse effect on the Company's results of
operations. As discussed below in "-- Competition," the Company's interconnect
capacity in Brazil is subject to the limitations imposed by Norma 14/97.
COMPETITION. The Company's success will depend on the Operating Companies'
ability to compete effectively with other communications services providers,
including landline telephone companies and other wireless communications
companies, in the markets in which the Operating Companies offer services. There
can be no assurance that the Company will be able to compete effectively in
operating ESMR networks in any of its markets, or whether such networks, if
competitive with existing systems will be able to compete effectively in the
future. For a more detailed description of the competitive factors affecting
each Operating Company, see the "Competition" discussion for each Operating
Company under "Business -- The Company's Operations and Investments." In
addition, the regulatory environment in the countries where the Operating
Companies conduct their business impose or may impose limitations that adversely
affect the Company's competitive position. See "-- Government Regulation."
The Company continuously reviews opportunities to acquire additional
licenses in new markets, primarily in emerging countries. In each new market,
the Company expects to face competition for such licenses from major
international telecommunications entities, as well as from local competitors.
RAPID TECHNOLOGICAL CHANGES. The telecommunications industry is subject to
rapid and significant changes in technology, which could lead to new products
and services that compete with those offered by the Company or lower the cost of
current competing products and services to the point where the Company's
products and services could become noncompetitive, thereby requiring the Company
to reduce the prices of its products and services. While the Company is not
aware of any proposed changes that will materially affect the attractiveness of
its product and service offerings, the effect of technological changes on the
Company's businesses cannot be predicted. In the future, the Company expects to
experience competition from new technologies such as PCS and possibly satellite
technology, as well as from advances with respect to existing technologies such
as ESMR, cellular, paging and mobile data transmission. There can be no
assurance that the Company will be able to adopt new technologies or to keep
pace with ongoing advances in existing technology.
RELIANCE ON LIMITED NUMBER OF EQUIPMENT SUPPLIERS. Motorola is expected to
provide most of the infrastructure and all of the subscriber handset equipment
to the Company for its ESMR systems for the foreseeable future. It is expected
that for the first few years of the Company's ESMR operations, Motorola
36
<PAGE> 37
will be the only manufacturer of subscriber equipment that is compatible with
the Company's ESMR networks. During 1997, the Company acquired from Motorola
approximately $87.3 million in infrastructure equipment and related services,
and in 1998, the Company has committed to purchase from Motorola $140 million of
additional infrastructure equipment and related services. In addition, the
Company purchases all of its switching equipment from Northern Telecom Limited.
Although the Company believes that it has or will be able to secure contractual
rights to procure sufficient equipment for its anticipated requirements, there
can be no assurance that such equipment will continue to be available to the
Company or that additional equipment would be available if demand for the
Company's services exceeds that currently projected in the Company's business
plan. Substantially all of the infrastructure and subscriber handset equipment
required by the Operating Companies is manufactured in North America.
Accordingly, in addition to any potential equipment manufacturing problems,
delays or disruptions affecting suppliers, the Company also could be adversely
affected by any inability or delays in shipping such equipment from its place of
manufacture to the overseas market where it is required.
EXPANSION; MANAGEMENT OF GROWTH. The Company has experienced rapid growth
through acquisitions and intends to continue to grow through further expansion
and upgrade of its existing operations, through acquisitions and joint ventures
and through the establishment of new operations. The Company continually seeks
additional opportunities in its existing and new markets.
The Company's planned ESMR network construction and expansion projects will
be subject to numerous risks, any of which could require substantial changes to
proposed plans or otherwise alter the time frames or budgets currently
contemplated. Such risks include (i) securing the necessary channel grants and
adhering to regulatory requirements relating thereto; (ii) locating suitable
sites for the Company's towers, obtaining any required zoning variances or other
governmental or local regulatory approvals, and negotiating acceptable purchase,
lease, joint venture or other agreements; (iii) negotiating favorable
interconnection agreements; (iv) delays that may be caused by frequency
cross-interference with other radio spectrum users, such as television stations;
and (v) risks typically associated with any construction project, including
possible shortages of equipment or skilled labor, engineering or environmental
problems, work stoppages, weather interference and unanticipated cost increases.
There can be no assurance that the Company's currently planned ESMR network
construction and expansion activities will be successful. Moreover, numerous
factors could cause the Company not to proceed with all or a portion of its ESMR
network construction and expansion plans or otherwise delay or alter its current
expansion plans. See "Regulatory and Legal Overview" section for each Operating
Company under Part I, Item 1, "Business -- The Company's Operations and
Investments."
Once the Company's ESMR network operations are in place in a particular
market, the Company's development of a significant subscriber base depends on
the success of its sales and marketing efforts and the receptiveness of the
marketplace. In most of its markets, the Company has limited experience in
marketing its wireless communications services and in tailoring its sales and
marketing to local conditions, and there can be no assurance that the Company's
sales and marketing teams will be able to successfully establish a large
subscriber base in its markets. In most of its markets, the Company will need to
rely in part on the efforts of independent dealers and distributors to market
its services.
The Company's planned ESMR construction and expansion activities include
planned commercial launches of service in five markets in 1998, three of which
are scheduled to occur during the first half of 1998. See "Business -- The
Company's Operations and Investments." As a result of its aggressive
construction and expansion plans, the Company faces significant challenges in
managing its expanded operations. The Company must hire and train a significant
number of key personnel to manage its growth, and its construction and expansion
plans will place substantial burdens on the Company's current management
resources, information systems and financial controls. In order to alleviate the
burden on the Company's management and to ensure that the ESMR service launches
are effected consistently in each country and with minimal difficulty, the
Company has assembled a U.S.-based operations team, which will work on-site with
the Operating Company management teams of each country to supervise the
commercial launch of ESMR services in such country and on-going management. In
addition, the Company expects to face significant challenges in integrating
newly acquired businesses with its existing operations. There can be no
assurance that
37
<PAGE> 38
the Company will be able to manage its growth effectively. Failure to do so
would have a material adverse effect on the Company's results of operations.
CONTROL BY NEXTEL COMMUNICATIONS AND ITS SIGNIFICANT STOCKHOLDERS;
CONFLICTS OF INTEREST; DEPENDENCE ON NEXTEL COMMUNICATIONS. The Company is an
indirect wholly owned subsidiary of Nextel Communications and Nextel
Communications therefore has the power to elect all the directors of the
Company. Of the seven directors that comprise the board of directors of the
Company, five are also directors and/or officers of Nextel Communications.
Nextel Communications and directors and officers of Nextel Communications who
are also directors of the Company are in positions that may result in conflicts
of interests with respect to transactions involving the Company. The Company
currently engages in and expects, in the future, to continue to engage in
transactions with Nextel Communications and its affiliates. See Part III, Item
13, "Certain Relationships and Related Transactions."
Based on securities ownership information relating to Nextel Communications
as of December 31, 1997, and after giving effect to the conversion of the
outstanding shares of preferred stock of Nextel Communications and the exercise
in full of outstanding options and warrants held by the entities controlled by
Craig O. McCaw (the "McCaw Group") and Motorola, the McCaw Group and Motorola
would beneficially own 24.4% and 15.1% of the Nextel Communications Class A
Common Stock, respectively, outstanding as of such date. Pursuant to the
Securities Purchase Agreement (the "McCaw Securities Purchase Agreement") dated
as of April 4, 1995, as amended, among Nextel Communications, a member of the
McCaw Group (the "McCaw Investor") and Craig O. McCaw, the McCaw Investor has
the right to designate not less than 25% of the board of directors of Nextel
Communications (the "Nextel Communications Board"). Additionally, the McCaw
Investor is effectively entitled to designate a majority of the members of the
Operations Committee of the Nextel Communications Board (the "Operations
Committee") and therefore has the ability to formulate key aspects of the
business strategy of Nextel Communications. As a result, the McCaw Investor is
in a position to exert significant influence over the affairs of Nextel
Communications, and thereby over the affairs of the Company.
The Company and Nextel Communications have entered into a
right-of-first-opportunity agreement (the "Non-Compete Agreement") effective as
of March 6, 1997, pursuant to which Nextel Communications has agreed that
neither Nextel Communications nor any Affiliate (as defined in the agreement)
controlled by Nextel Communications will in the future participate in the
ownership or operation of two-way terrestrial-based mobile wireless
communications systems ("Wireless Entities") anywhere other than in the United
States and Canada (for so long as Nextel Communications owns an equity interest
in Clearnet) unless such opportunities ("Future Wireless Opportunity") have
first been presented to the Company. Such restriction will not apply to, among
other things, any commercial relationship with any Wireless Entity (including
channel or frequency sharing, roaming, purchase or sale of goods or services,
licensing of intellectual property or other intangible rights or similar
business related arrangement) that does not involve the directing or
participating in the management of such Wireless Entity. The Company has agreed
that, without the consent of Nextel Communications, neither it, its Restricted
Affiliates nor any of its Unrestricted Affiliates (each as defined in the
indentures for the March 1997 Notes and the March 1998 Notes) will participate
in the ownership or management of any wireless communications service business
in the United States or Canada other than with respect to its interest in
Clearnet. Such restrictions terminate upon the earliest to occur of (i) April
15, 2007 and (ii) the date on which a Change of Control occurs (as defined in
the Existing Indentures).
If Nextel Communications gives the Company notice (the "Initial Notice") of
a Future Wireless Opportunity, the Company will have 60 days to notify Nextel
Communications that it intends to pursue such opportunity and how it intends to
finance its participation. The Company must have secured a financing commitment
within 90 days of the date of the Initial Notice and the Future Wireless
Opportunity must be consummated within nine months of the date of the Initial
Notice. In the event the Company fails to respond to Nextel Communications
within the 60 and 90 day periods or fails to consummate the transaction within
the nine-month period, Nextel Communications will be free to pursue the Future
Wireless Opportunity.
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<PAGE> 39
Each of the McCaw Group and Motorola has and (subject to the terms of
applicable agreements between such parties and Nextel Communications) may have
an investment or interest in entities that provide wireless communications
services that could potentially compete with Nextel Communications and the
Company. Under the McCaw Securities Purchase Agreement, the McCaw Investor,
Craig O. McCaw and their Controlled Affiliates (as defined in the McCaw
Securities Purchase Agreement) may not, for a period of time, participate in
other two-way terrestrial based mobile wireless communications systems in the
region that includes any part of North America or South America unless such
opportunities have first been presented to and rejected by Nextel
Communications. Such restrictions terminate on the later to occur of July 28,
2000 and one year after the termination of the Operations Committee.
The Company also depends on Nextel Communications to provide it with
various services including technology assistance, as well as certain
administrative services. Such services are provided pursuant to an overhead
services agreement. See Part III, Item 13, "Certain Relationships and Related
Transactions."
In November 1996, Nextel Communications, the Company and Motorola entered
into a binding memorandum of understanding regarding the provision of equipment
financing by Motorola, including the Motorola Financings (the "Motorola MOU").
Under the Motorola MOU, Motorola agreed to provide an aggregate of up to $400
million in vendor financing to Nextel Communications and Nextel International
for the worldwide purchase of iDEN equipment and services and ancillary products
(such as switches). In March 1997, Motorola and Nextel Communications entered
into a term sheet increasing the maximum worldwide vendor financing available to
Nextel Communications and the Company to $650 million, with a maximum non-U.S.
amount outstanding of $400 million, subject to certain per-country limits as
agreed in the Motorola MOU. The Motorola MOU sets a limit of $125 million per
country (other than the United States and Canada) on the amount that may be
borrowed under the Motorola Financings. In June 1997 and October 1997, the
Company and Motorola entered into definitive agreements for financing the
purchase of up to $14.7 million and $125 million of equipment by Nextel
Philippines and Nextel Brazil, respectively.
Commitments provided by Motorola to provide financing to any Operating
Company (other than Clearnet), including Nextel Brazil and Nextel Philippines,
count 100% against Motorola's $650 million aggregate commitment. Currently,
Motorola has not committed any financing to any Operating Company other than the
existing Motorola Financings described above. The Motorola MOU contemplates that
the loans under the Motorola Financings will bear interest at a rate of 2% to 4%
over prime rate, depending on the Operating Company placing the order and the
country in which such company is installing the iDEN equipment, and that such
loans could have a maturity of up to six years. Borrowings by an Operating
Company may be secured by all the assets and stock of such Operating Company and
it is expected that the Company will guarantee such borrowings on a pro rata
basis based on the equity interest of the Company in the Operating Company
incurring such borrowings. For a description of the definitive terms of the
existing Motorola Financings entered into by Nextel Brazil and Nextel
Philippines, see Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Any amounts available to be borrowed by the Operating Companies under the
Motorola Financings will be reduced by any amounts borrowed by Nextel
Communications and its subsidiaries other than the Company and the Operating
Companies. Nextel Communications has committed to the Company that at least $95
million of the financing contemplated to be provided by Motorola pursuant to the
Motorola MOU will be available to the Company. On March 13, 1998, Nextel
Communications and its relevant subsidiaries entered into a new and increased
bank credit facility with respect to its United States operations, and upon the
consummation of such new facility, Nextel Communications made certain initial
borrowings thereunder for, among other purposes, the repayment in full of all
amounts then outstanding under its United States vendor financing arrangements
with, among other lenders, Motorola. Simultaneously with such repayment, Nextel
Communications terminated all related agreements and lines of credit with
Motorola that relate to the United States. Although Nextel Communications has
indicated no present intention to borrow any additional amounts from Motorola
pursuant to the Motorola MOU, Motorola and Nextel Communications are not
precluded in the future from entering into agreements to make such financing
available to Nextel Communications and its U.S. subsidiaries. Accordingly, there
can be no assurance that more than $95 million of the Motorola Financing will be
available to fund the Operating Companies' equipment purchases. In addition, to
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the extent total amounts outstanding from Motorola to Nextel Communications and
its subsidiaries, including the Company and the Operating Companies (other than
Clearnet), plus requests for additional financing from Motorola by Nextel
Communications and its subsidiaries (other than the Company and the Operating
Companies) would exceed $650 million, the Company is required to repay or cause
to be repaid sufficient borrowings such that after giving effect to such
repayment, the total amount of loans outstanding from Motorola to Nextel
Communications and its subsidiaries, including the Company and the Operating
Companies (other than Clearnet), will not exceed $650 million. Nextel
Communications (on behalf of itself and its subsidiaries other than the Company
and the Operating Companies) has agreed with the Company not to borrow more than
$400 million under the Motorola MOU.
Although Nextel Communications has provided a substantial amount of
financing to the Company prior to the March 1997 Offering, it has not done so
since that time and is under no obligation to do so in the future.
DEPENDENCE ON KEY PERSONNEL. The success of the Company and its growth
strategy depends in large part on the Company's ability to attract and retain
key management, marketing, finance and operating personnel, both at the Company
and the Operating Companies. In many of the countries in which the Operating
Companies conduct business, experienced management and other highly skilled
personnel are in great demand. There can be no assurance that the Company will
continue to attract and retain the qualified personnel necessary for its
business. In addition, the loss of the services of one or more members of its
senior management team, in particular Keith D. Grinstein, the Company's
President and Chief Executive Officer, could have a material adverse effect on
the Company. The Company does not maintain key person life insurance.
RISKS ASSOCIATED WITH EMERGING MARKETS; UNCERTAINTIES ASSOCIATED WITH A NEW
INDUSTRY. Most of the Company's markets are considered to be "emerging
markets." Although political, economic and social conditions differ in each
country in which the Company currently operates, developments in one country may
affect the Company as a whole, including its ability to access international
capital markets. In Peru, for example, there was significant terrorist activity
in the 1980s and the early 1990s, during which period anti-government groups
escalated violence against the government, the private sector and Peruvian
residents. Although the government of Peru has made progress in suppressing
terrorist activity since 1990, incidents of terrorist activity continue to
occur, including the hostage incident at the residence of the Japanese
Ambassador to Peru in 1997. There can be no assurance that such activity will
not recur in the future or have a material adverse effect on the operations of
Nextel Peru. The Company currently does not have political risk insurance in the
countries in which the Operating Companies conduct business.
The success of the Company's operating strategies is subject to factors
that are beyond the Company's control and impossible to predict due, in part, to
the limited history of wireless communications services in the Company's
existing and targeted markets. Consequently, the size of these markets for
wireless communications services, the rates of penetration of these markets, the
sensitivity and ability of potential subscribers to pay subscription and other
fees, the extent and nature of the competitive environment and the immediate and
long-term viability of wireless communications services in these markets are
uncertain.
CURRENCY RISKS AND EXCHANGE CONTROLS. All of the Company's revenues will
be denominated in non-U.S. currencies, although a significant portion of its
capital and operating expenditures, including imported infrastructure and
subscriber handset equipment, and the interest expense on substantially all of
its outstanding debt, will be denominated in U.S. dollars. Accordingly,
fluctuations in exchange rates relative to the U.S. dollar may have a material
adverse effect on the Company's earnings or assets. In particular, the recent
economic turmoil in Asia has resulted in a significant devaluation of the
currencies in several countries in Asia and has caused fluctuations in the
currencies of other emerging countries, particularly in Latin America. Any
devaluation of local currencies in the countries in which the Operating
Companies conduct business will result in increased costs for imported goods and
services, and may, as a result, decrease demand for the Company's products and
services in the affected markets. To the extent the Operating Companies
distribute dividends in local currencies in the future, the amount of cash to be
received by the Company will be affected by fluctuations in exchange rates and
currency devaluations recently experienced by many Asian
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and Latin American countries. In addition, certain of the countries in which the
Company has operations restrict the expatriation or conversion of currency.
LOCAL ECONOMIES; POTENTIAL INFLATION. The Company's operations depend on
the economies of the markets in which it has interests. These markets are in
countries with economies in various stages of development or structural reform,
some of which are subject to rapid fluctuations in terms of consumer prices,
employment levels, gross domestic product and interest and foreign exchange
rates. The Company may be subject to such fluctuation in the local economies. To
the extent such fluctuations have an effect on the ability of customers to pay
for the Operating Companies' services, the growth of the Company's wireless
services could be impacted negatively. In particular, several countries in Asia,
including the Philippines, have experienced a significant devaluation of their
currencies and a decline in the value of their capital markets. In addition,
these countries have experienced a number of bank failures and consolidations.
The economic conditions in Asia have also affected other emerging markets,
particularly those in Latin America. Because of the foregoing, the Company may
experience (i) lower demand for its products and services by customers in the
affected markets; (ii) increased local costs of imported goods and services due
to the local currency devaluations in the affected markets; and (iii) a decline
in revenues derived from customers in the affected markets. In addition, as a
result of the foregoing, the other shareholders in Operating Companies may have
difficulty in funding their capital requirements.
In addition, many of the countries in which the Operating Companies operate
do not have established credit bureaus, thereby making it more difficult to
ascertain the creditworthiness of potential customers. Accordingly, the Company
may experience a higher level of bad debt expense than otherwise would be the
case. In particular, the Company's bad debt expense as a percentage of revenues
in Brazil and Argentina has been significantly higher than in the Company's
other markets.
Certain of the Operating Companies conduct business in countries in which
the rate of inflation is significantly higher than that of the United States.
There can be no assurance that any significant increase in the rate of inflation
in such countries could be offset, in whole or in part, by corresponding price
increases by the Operating Companies, even over the long term.
IMPORT DUTIES ON NETWORK EQUIPMENT AND HANDSETS. The Company's operations
are highly dependent upon the successful and cost-efficient importation of
infrastructure equipment and handsets from North America and, to a lesser
extent, Europe and Japan. In the countries in which the Company operates,
network equipment and handsets are subject to significant import duties and
other taxes that can be as high as 50%. Although the Company believes there is a
trend away from increased import duties, any significant increase in the future
could have a material adverse effect on the Company's results of operations.
INTERNATIONAL TAX RISKS. Distributions of earnings and other payments
(including interest) received from the Company's operating subsidiaries and
affiliates may be subject to withholding taxes imposed by the jurisdictions in
which such entities are formed or operating, which will reduce the amount of
after-tax cash the Company can receive from the Operating Companies. In general,
a U.S. corporation may claim a foreign tax credit against its federal income tax
expense for such foreign withholding taxes and for foreign income taxes paid
directly by foreign corporate entities in which the Company owns 10% or more of
the voting stock. The ability to claim such foreign tax credits and to utilize
net foreign losses is, however, subject to numerous limitations, and the Company
may incur incremental tax costs as a result of these limitations or because the
Company is not in a tax-paying position in the United States.
The Company may also be required to include in its income for U.S. federal
income tax purposes its proportionate share of certain earnings of those foreign
corporate subsidiaries that are classified as "controlled foreign corporations"
without regard to whether distributions have been actually received from such
subsidiaries.
LEGAL ENFORCEMENT. A number of the agreements the Company enters into with
the Operating Companies are governed by the laws of, and are subject to dispute
resolution in the courts of, or through arbitration proceedings in, the country
or region in which the operation is located. The Company cannot accurately
predict whether such forum will provide it with an effective and efficient means
of resolving
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disputes that may arise in the future. Even if the Company is able to obtain a
satisfactory decision through arbitration or a court proceeding, it could have
difficulty enforcing any award or judgment on a timely basis. The Company's
ability to obtain or enforce relief in the United States is uncertain.
FOREIGN CORRUPT PRACTICES ACT. The Company is subject to the Foreign
Corrupt Practices Act (the "FCPA"), which generally prohibits U.S. companies and
their intermediaries from bribing foreign officials for the purpose of obtaining
or keeping business. Although the Company has taken precautions to comply with
the FCPA, there can be no assurance that such precautions will protect the
Company against liability under the FCPA, particularly as a result of actions
which may in the past have been taken or which may be taken in the future by
agents and other intermediaries for whom the Company may have exposure under the
FCPA. In particular, the Company may be held responsible for actions taken by
its local representatives or by other shareholders in an Operating Company even
though the Company has no ability to control them. Any determination that the
Company had violated the FCPA could have a material adverse effect on the
Company.
RADIO FREQUENCY EMISSION CONCERNS. Allegations have been made, but not
proven, that the use of portable mobile communications devices may pose health
risks due to radio frequency emissions from such devices. Studies performed by
wireless telephone equipment manufacturers have rebutted these allegations, and
a major industry trade association and certain governmental agencies in the
United States have stated publicly that the use of such phones poses no undue
health risk. Certain consumers have alleged that serious health risks have
resulted from the use of certain mobile communications devices. The actual or
perceived health risks of mobile communications devices could adversely affect
mobile communications services providers, including the Company, through reduced
subscriber growth, reduced network usage, the threat of product liability suits
or limitations on financing available to the mobile communications industry.
FORWARD-LOOKING STATEMENTS. A number of the matters and subject areas
discussed herein that are not historical or current facts deal with potential
future circumstances and developments. The discussion of such matters and
subject areas is qualified by the inherent risks and uncertainties surrounding
future expectations generally, and also may differ materially from the Company's
actual future experience involving any one or more of such matters and subject
areas. The Company has attempted to identify, in context, certain of the factors
that it currently believes may cause actual future experience and results to
differ from the Company's current expectations regarding the relevant matter or
subject area. The operations and results of the Company's business also may be
subject to the effect of other risks and uncertainties in addition to the
relevant qualifying factors identified elsewhere in the foregoing "Risk Factors"
section, including, but not limited to, general economic conditions in Latin
America and Asia, as a result of the recent Asian economic crisis, the market
segments that the Company is targeting for SMR and ESMR commercial services,
future legislation or regulation by governmental entities in the markets in
which the Operating Companies conduct their business, the availability of
adequate quantities of system infrastructure and subscriber equipment and
components to meet the Company's service and deployment and marketing plans and
customer demand, access to sufficient debt and equity financing to meet the
Company's operating and financial needs, the successful deployment of the iDEN
digital technology, the ability to achieve market penetration and average
subscriber revenue level sufficient to provide financial viability to the
Company's wireless communications business, the Company's ability to timely and
successfully accomplish required scale-up of its billing, customer care and
similar back-room operations to keep pace with anticipated customer growth and
increased system usage, the quality and price of similar or comparable wireless
communications services offered or to be offered by the Company's competitors,
including providers of cellular and PCS, other wireless communications services
or telecommunications generally and other risks and uncertainties described from
time to time in the Company's reports filed with the Commission.
ITEM 2. PROPERTIES
The Company currently leases 6,559 square feet for its principal executive
and administrative offices in Seattle, Washington, and payments under such lease
equals approximately $110,000 per year. In addition, the Company's subsidiaries
have leases for office space and transmission sites in each of the countries
where the Operating Companies conduct business.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the period commencing October 1, 1997 and concluding December 31, 1997,
which is the final quarter covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKET INFORMATION
There is no public trading market for the Company's common equity. A wholly
owned subsidiary of Nextel Communications is the sole holder of record of the
Company's Common Stock.
DIVIDENDS
The Company has not paid any dividends on its equity securities. Covenants
in the Existing Indentures restrict the Company's ability to pay cash dividends
on its equity securities.
SALES OF UNREGISTERED SECURITIES
The Company did not sell any equity securities during the period covered by
this report.
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ITEM 6. SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth the selected financial data on a
consolidated historical basis for the Company as of December 31, 1994, 1995,
1996 and 1997, and for the years then-ended. The selected consolidated
historical financial data of the Company as of and for the years ended December
31, 1994, 1995, 1996 and 1997 were derived from the consolidated financial
statements and the notes thereto of the Company, which have been audited by
Deloitte & Touche LLP, independent auditors, whose report, with respect to each
of the three years ended December 31, 1997 and at December 31, 1996 and 1997,
has been included herein.
The selected consolidated historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements,
including the notes thereto, appearing elsewhere in Part II of this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996 1997
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ -- $ -- $ -- $ 13,015
Costs and expenses related to revenues............. -- -- -- 7,424
Selling, general and administrative................ -- 277 9,318 26,768
Depreciation and amortization...................... 2 19 168 18,381
-------- -------- -------- ---------
Operating loss..................................... (2) (296) (9,486) (39,558)
Interest income.................................... 2,688 6,233 4,300 19,666
Interest expense................................... -- -- (323) (56,583)
Loss from equity method investments................ -- (6,853) (5,991) (11,401)
Other, net(1)...................................... -- (15,002) 379 5,561
Minority interest.................................. -- -- -- 2,085
-------- -------- -------- ---------
Income (loss) before income tax benefit
(provision)...................................... 2,686 (15,918) (11,121) (80,230)
Income tax benefit (provision)..................... (914) (2,119) (1,355) 6,282
-------- -------- -------- ---------
Net income (loss).................................. $ 1,772 $(18,037) $(12,476) $ (73,948)
======== ======== ======== =========
Net income (loss) per share, basic and diluted..... $ 0.05 $ (0.49) $ (0.34) $ (2.03)
Weighted average shares outstanding(2)............. 36,500 36,500 36,500 36,500
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents(3)....................... $125,542 $ 85,302 $ 53,029 $ 159,790
Marketable securities.............................. -- -- -- 128,560
Property, plant and equipment, net................. -- 36 8,703 136,210
Investment in unconsolidated subsidiaries.......... -- 47,951 98,982 106,489
Intangible assets, net............................. -- 10,135 10,878 526,000
Total assets....................................... 171,536 169,675 199,367 1,123,038
Current portion of long-term debt.................. -- -- -- 2,211
Long-term debt, excluding current portion.......... -- -- -- 597,809
Stockholders' equity............................... 1,772 11,939 39,203 296,029
</TABLE>
- ---------------
(1) Other, net includes a $15.0 million charge in 1995 representing an other
than temporary decline in the fair value of the Company's investment in
Nextel Mexico as a result of a decline in the Mexican Peso.
(2) As adjusted for the 100,000-for-1 stock split effective March 6, 1997 and
the 3.65-for-1 stock split effective August 25, 1997.
(3) Includes approximately $69.0 million of cash held by the Company at December
31, 1997 that is restricted for use as equity investments under the
Company's financing agreements and equipment purchases under certain
infrastructure purchase contracts.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto appearing
elsewhere in Part II of this Annual Report on Form 10-K.
OVERVIEW
GENERAL
Nextel International provides wireless communications services in five of
the largest cities in Latin America and two of the largest cities in Asia. As of
December 31, 1997, the Company's markets covered approximately 248 million POPs,
approximately 131 million of which are in Latin America. Nextel International is
the largest SMR service provider in Brazil and Mexico, and holds the largest SMR
channel position in Argentina. The Company's strategy is focused on using its
leading analog dispatch or SMR channel positions in its principal markets,
together with Nextel Communications' experience and supplier relationships, to
upgrade its services from analog dispatch to digital ESMR services, using
Motorola's iDEN technology. The Company currently plans to launch ESMR
commercial service in Sao Paulo during the first half of 1998, Buenos Aires and
Rio de Janeiro during the second quarter of 1998 and Mexico City and Manila
during the third quarter of 1998. The timing of the Company's currently planned
launch schedule depends on a number of factors, some of which are beyond the
Company's control. See Part I, Item 1, "Business -- The Company's Operations and
Investments." The Company's upgrade to digital networks will allow it to
increase capacity significantly and to offer in a single digital subscriber
unit, additional services and advanced features, such as direct connect (group
calling and instant conferencing), telephone interconnect and text messaging
services.
As of December 31, 1997, the Company directly or indirectly owned 100% of
Nextel Mexico; 50% of Nextel Argentina, accounted for using the equity method;
30% of Nextel Philippines, accounted for using the equity method; 3.7% of
Clearnet, accounted for as an investment available-for-sale and reflected at
fair market value and a contractual right to receive 12.1% of the profits of the
Shanghai GSM System, accounted for as a cost method investment. Additionally,
the Company, through an 81% equity interest in Nextel Brazil and Nextel Brazil's
95% equity interest in Nextel S.A., held a 77% equity interest in Nextel S.A.
Accordingly, the Company's consolidated financial statements include the
accounts of Nextel Brazil and Nextel Mexico commencing January 30, 1997 and
September 1, 1997, respectively, which are the dates when the Company acquired a
controlling interest in the respective companies. Prior to September 1, 1997,
Nextel Mexico was accounted for using the equity method. The Company's
consolidated financial statements include the accounts of Nextel Argentina prior
to May 6, 1997, when it was contributed to a joint venture (the "Argentina Joint
Venture") in which the Company then owned 50% of the outstanding equity. The
Company's initial acquisition of an 81% interest in Nextel Brazil on January 30,
1997, the MCS Transaction and the Company's increase in its equity interest in
Nextel Mexico (through a series of transactions) from 30.1% to 100% were
accounted for under the purchase method and the excess of the purchase price
over book value was allocated to licenses and goodwill based on their
preliminary estimated fair values and will be amortized over 20 years.
On January 1, 1997 and March 3, 1997, respectively, Nextel International
(Services), Ltd. ("Nextel Services") (formerly McCaw International (Services),
Ltd.) and Nextel International (CANMEX), Ltd. ("Nextel Canmex"), both wholly
owned subsidiaries of Nextel Communications, were merged into the Company. As
these mergers represented transfers between companies under common control, they
have been accounted for in a manner similar to poolings of interest;
accordingly, the historical financial statements reflect the combined financial
position and results of operations of the Company, Nextel Services and Nextel
Canmex for all periods presented.
On January 29, 1998, the Company acquired 70.1% of the common equity of
Nextel Peru for $27.9 million, $23.8 million of which will represent new capital
to be contributed to Nextel Peru to finance the expansion, upgrade and operation
of its wireless services business. To date the Company has paid $7.0 million to
Nextel Peru and the remaining $20.9 million will be paid in the form of capital
contributions, which the Company expects will be made prior to July 30, 1998. On
January 30, 1998, the Company acquired an additional 50% equity interest in
Nextel Argentina through the Argentina Acquisition. Accordingly, the
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Company's historical financial statements for 1998 will consolidate the accounts
of Nextel Peru and Nextel Argentina. The acquisition of Nextel Peru and the
Argentina Acquisition were accounted for under the purchase method and the
excess of the purchase price over book value was allocated to licenses and
goodwill based on their preliminary estimated fair value and will be amortized
over 20 years. In addition, the Company has negotiated the right to acquire a
37.5% interest in MKT, an Indonesian joint venture, which holds a provisional
license for 80 SMR channels. The Company's further participation in MKT through
the acquisition of such 37.5% interest is subject to receipt of certain
Indonesian regulatory approvals. To date the Company has advanced approximately
$1.5 million as loans to MKT (which are guaranteed by the holder of the
principal ownership interest in MKT). The Company does not intend to make any
substantial investment in the joint venture until the economic and political
conditions in Indonesia, and the economic conditions in Asia generally, have
stabilized. To the extent the Company does acquire a 37.5% interest in MKT,
under U.S. GAAP as in existence on the date hereof, such investment would be
accounted for under the equity method. On March 12, 1998, the Company
consummated the Clearnet Transaction.
The accounts of the Company's consolidated foreign subsidiaries and those
foreign subsidiaries accounted for under the equity method are presented
utilizing accounts as of a date one month earlier than the accounts of the
Company and its United States subsidiaries to ensure timely reporting of
consolidated results.
REVENUES
The Company derives its revenues primarily from (i) activation fees, which
are the initial charges paid by a new subscriber for service; (ii) monthly fixed
access charges, which vary depending on the plan chosen by the subscriber; (iii)
airtime charges, which are billed based on usage; (iv) monthly rental charges,
which are derived from the leasing of wireless equipment; (v) the sale of
handsets to subscribers; and (vi) in certain markets, various local taxes and
fees which are passed on to customers. Each Operating Company sets the pricing
of the different components of its services in accordance with its marketing
plan in each of the markets in which it operates, taking into account, among
other things, competitive factors. Usage revenues are accrued for during the
month incurred and billed at the end of the monthly billing cycle. Rental fee
revenues and monthly fixed access charges are billed in advance and recognized
in the period service was delivered. Equipment sales are recognized at the time
of sale.
In general, revenue per subscriber is higher in the Company's markets than
in the United States. In part, this is due to the poor quality of landline
service and unsatisfied demand for telephony services generally found in
emerging markets. In many emerging markets, including most of those in which the
Operating Companies conduct business, wireless service is often used as a
substitute for landline service, which increases the relative usage per
subscriber and the revenue per subscriber.
The Company is subject to the laws and regulations governing
telecommunication services in effect in each of the countries in which the
Operating Companies conduct business. These laws and regulations cover, among
other things, the number of licenses that can be used in any one service area by
affiliated companies, the construction and loading requirements necessary to
retain a license, the number of telephone numbers that can be assigned to an
individual licensee and the type of customer to whom service can be provided and
the rights of a licensee to interconnect with a public telecommunications
network. Each of these factors can have a significant influence on the Company's
ability to generate revenues and are subject to change by the governmental
agency responsible for determining the laws and regulations in the respective
countries. The Company cannot predict what future laws and regulations might be
passed that could have a material effect on the Company's results of operations.
The Company assesses the impact of significant changes in laws and regulations
on a regular basis.
COSTS AND EXPENSES RELATED TO REVENUES
Costs and expenses related to revenues include both the cost of radio
service revenue and the cost of equipment sales and maintenance. Cost of radio
service revenue represents the cost of maintaining networks, interconnection
charges, site lease costs, technical expenses and utilities. The Company
anticipates the cost of radio service revenue will increase with the expansion
of its wireless networks.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
At the corporate level, selling, general and administrative expenses
consist primarily of compensation expenses and to a lesser extent include
expenses such as rent, professional fees and other general corporate expenses.
At the Operating Company level, selling, general and administrative expenses
consist primarily of customer acquisition costs, advertising and to a lesser
degree, salaries and office expenses. Prior to 1997, substantially all of
selling, general and administrative expenses were incurred at the Nextel
International level. As the consolidated Operating Companies continue to expand
their wireless communications networks and add subscribers, the Company expects
a larger portion of selling, general and administrative expenses to be incurred
at the Operating Company level. The Company expects selling, general and
administrative expenses to increase over time as it continues to expand its
operations.
The Company is billed directly on a monthly basis by landline telephone
companies for interconnect services and by various governments for taxes. The
Company bills its subscribers for these charges and taxes and is responsible for
collecting the charges and taxes from them. Many of the countries in which the
Company operates do not have established credit bureaus, thereby making it more
difficult for the Company to ascertain the creditworthiness of potential
customers. Accordingly, the Company experiences a relatively high level of bad
debt expense in most of its markets. In particular, the Company's bad debt
expense as a percentage of revenue and customer turnover in Brazil and Argentina
have been significantly higher than that in the Company's other markets.
DEPRECIATION AND AMORTIZATION
Historically, the Company's depreciation and amortization expense has been
primarily attributable to the depreciation of property, plant and equipment at
its corporate headquarters. As a result of the acquisition of Nextel Brazil in
January 1997, Nextel Mexico in August 1997, Nextel Argentina and Nextel Peru in
January 1998 and possible future acquisitions, the Company expects depreciation
and amortization to increase significantly.
INTEREST INCOME
Interest income represents income earned on notes receivable, cash and cash
equivalents and marketable securities. Interest income is expected to increase
temporarily in 1998 as the net proceeds of the March 1998 Offering are invested
pending their application as set forth under Part I, Item 1, "Business -- 1998
Plan."
INTEREST EXPENSE
Historically, interest expense has consisted of amounts payable on the
March 1997 Notes and to a lesser extent outstanding borrowings under the Brazil
Motorola Financing. Interest expense is expected to increase in future periods
as a result of the March 1998 Offering and the incurrence of additional
indebtedness, including under the Brazil Motorola Financing and the Argentina
Credit Facility.
LOSS FROM EQUITY METHOD INVESTMENTS
Loss from equity method investments represents the Company's proportionate
share of net income or loss from its investments in companies of which it owns
between 20% and 50%. For the year ended, December 31, 1997, loss from equity
method investments consisted of the Company's proportionate share of net losses
from its interest in Nextel Mexico prior to obtaining a majority interest in
August 1997, 30% interest in Nextel Philippines and 50% interest in Nextel
Argentina after May 6, 1997. Loss from equity method investments also includes
amortization of the excess purchase price over net assets acquired in its
investments in entities accounted for under the equity method.
OTHER, NET
Other, net consists primarily of foreign currency transaction gains and
losses. In addition, it also includes fees received for management services
provided to Shanghai CCT McCaw and Nextel Philippines.
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MINORITY INTEREST
Minority interest represents the 19% interest in Nextel Brazil (or
approximately 23% interest in Nextel S.A. subsequent to the MCS Transaction) not
owned by the Company and the 23% minority interest in Nextel Mexico not owned by
the Company prior to acquiring 100% of Nextel Mexico.
INCOME TAX BENEFIT (PROVISION)
The Company is subject to income taxes in the United States and in each of
the jurisdictions in which the Operating Companies conduct business. In the
United States, the Company is included in the consolidated tax return of Nextel
Communications; however, the tax accounts are stated as if the Company filed a
separate return pursuant to the terms of a Tax Sharing Agreement between the
Company and Nextel Communications dated as of March 6, 1997 (the "Tax Sharing
Agreement").
In the periods prior to the Company's merger with Nextel Canmex, the
Company was precluded from recognizing income tax benefits associated with its
U.S. net operating losses because it was not reasonably certain that the Company
would generate taxable income. Historically on a stand-alone basis, Nextel
Canmex generated taxable income from the interest earned on its investments of
cash and cash equivalents. As accounting rules related to the pooling of
interest method of accounting preclude the offsetting of the Company's
historical net operating losses against Nextel Canmex's historical taxable
income, the Company has recognized only the Nextel Canmex income tax expense in
the combined financial statements presented prior to the merger date. Subsequent
to the merger, which occurred in the first quarter of 1997, the Company combined
the tax attributes of the merged companies. The Company is obligated to pay to
Nextel Communications, pursuant to the Tax Sharing Agreement, amounts for taxes
paid by Nextel Communications because net operating losses at the Operating
Company level cannot be used for United States income tax purposes and interest
expense on the March 1997 Notes is not, and interest expense on the March 1998
Notes is not expected to be, deductible for United States income tax purposes.
Subsequent to the acquisitions of Nextel Brazil and Nextel Mexico, the
Company recognized income tax benefit related to its operations in Brazil and
Mexico. Certain of the Brazilian and Mexican subsidiaries have taxable temporary
differences allowing for the recognition of the tax benefits derived from net
operating losses. The Company expects that the tax benefits from net operating
losses in these Brazilian and Mexican subsidiaries will continue to be
recognized in its financial statements throughout 1998.
YEAR ENDED DECEMBER 31, 1997 AND 1996
The Company's consolidated financial statements include the accounts of
Nextel Brazil and Nextel Mexico commencing January 30, 1997 and September 1,
1997, respectively, which are the dates when the Company acquired a controlling
interest in the respective companies. Prior to September 1, 1997, Nextel Mexico
was accounted for using the equity method. The Company's consolidated financial
statements also include the accounts of Nextel Argentina prior to May 6, 1997,
when it was contributed to the Argentina Joint Venture. On and after May 6,
Nextel Argentina is accounted for using the equity method. In 1997,
substantially all of the revenues and costs and expenses related to revenues
result from the eleven months of Nextel Brazil's SMR operations and four months
of Nextel Mexico's SMR operations included in the Company's consolidated
financial statements.
Revenues increased to $13.0 million in 1997 from $0 in 1996. The increase
in revenues is primarily attributable to fees generated from analog SMR services
provided in Brazil in 1997 by affiliates of Nextel Brazil and from analog SMR
services provided in Mexico in 1997 by affiliates of Nextel Mexico. Nextel
Argentina commenced commercial operations in February 1997; therefore, minimal
revenues were recognized in 1997 and no revenues were recognized in 1996.
Selling, general and administrative expenses increased $17.5 million to
$26.8 million in 1997 from $9.3 million in 1996. Approximately $17.4 million of
the increase is attributable to Nextel Brazil. Additionally, approximately $2.4
million of the increase is attributable to the four months of Nextel Mexico's
SMR operations. The increase in selling, general and administrative expenses
from Nextel Brazil's and Nextel
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Mexico's operations was offset by a $2.0 million decrease attributable to the
contribution of Nextel Argentina to the Argentina Joint Venture.
Depreciation and amortization increased to $18.4 million in 1997 from
$200,000 in 1996. Approximately $14.0 million and $3.8 million of the increase
is attributable to the depreciation and amortization expense of Nextel Brazil
and Nextel Mexico, respectively. The remaining increase is due to the
amortization of licenses in Nextel Argentina.
Interest income increased $15.4 million to $19.7 million in 1997 from $4.3
million in 1996. The increase was primarily attributable to income recognized on
the investment of the net proceeds from the March 1997 Notes Offering prior to
their application in the Company's business.
Interest expense of $56.6 million was recognized in 1997, which primarily
represents accretion on the March 1997 Notes and amortization of associated debt
issue costs. In 1997, the Company capitalized $2.5 million of interest expense
in connection with the construction and development of its digital ESMR
networks. No significant interest expense was recognized in 1996.
Loss from equity method investments increased $5.4 million to $11.4 million
in 1997 from $6.0 million in 1996. The increase was primarily attributable to
approximately $5.1 million in losses associated with the Company's 50% interest
in the Argentina Joint Venture. Additionally, losses associated with its 30%
interest in Nextel Philippines increased $2.6 million primarily due to the
effect of the devaluation of the Philippine peso. The increase in loss from
equity method investments was partially offset by the effect of Nextel Mexico no
longer being accounted for under the equity method.
Other net of $5.6 million increased from $400,000 in 1996. The increase in
1997 is primarily attributable to approximately $6.0 million in foreign currency
transaction gains recognized upon the remeasurement of Nextel Brazil's and
Nextel Mexico's net monetary liabilities denominated in the local currency to
the U.S. dollar.
Minority interest in the net loss of Nextel Brazil and Nextel Mexico
totaled $2.1 million in 1997. The amount is primarily attributable to the
minority shareholders' approximately 23% interest in the net loss of Nextel
Brazil.
The Company recognized an income tax benefit of $6.3 million in 1997
compared to an income tax provision of $1.4 million in 1996. The income tax
benefit recognized in 1997 was primarily attributable to $8.0 million of
operating losses and changes in temporary timing differences of Nextel Brazil
and Nextel Mexico. The foreign income tax benefits recognized during 1997 were
partially offset by a U.S. tax provision of $1.7 million resulting from the
taxes payable on the interest income associated with the investment of the net
proceeds from the March 1997 Offering pending their application in the Company's
business. The income tax provision recognized in 1996 was primarily attributable
to the taxes associated with Nextel Canmex's interest income.
YEAR ENDED DECEMBER 31, 1996 AND 1995
Nextel Argentina commenced commercial operations in February 1997.
Accordingly, there were no revenues or costs and expenses related to revenues in
1996 and 1995.
Selling, general and administrative expenses increased $9.0 million to $9.3
million in 1996 from $300,000 in 1995. The increase is attributable to $6.3
million of additional expenses related to the increase in staffing and expenses
associated with the corporate oversight function, $1.3 million related to Nextel
Argentina start-up costs and $1.4 million of inventory write-offs at Nextel
Argentina.
Depreciation and amortization expense increased to $200,000 in 1996 from $0
in 1995. The increase is primarily attributable to depreciation from property,
plant and equipment associated with the corporate oversight function.
Interest income decreased $1.9 million to $4.3 million in 1996 from $6.2
million in 1995. The decrease is primarily due to lower amounts of cash and cash
equivalents on hand during 1996.
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Interest expense of $300,000 represents interest accrued on an intercompany
note payable to Nextel Communications outstanding during the fourth quarter of
1996. No interest-bearing intercompany notes existed during 1995.
Loss from equity method investments decreased $900,000 to $6.0 million in
1996 from $6.9 million in 1995. The decrease is primarily attributable to the
net loss of Nextel Mexico decreasing from $31.3 million in 1995 to $11.8 million
in 1996. The decrease in the net loss of Nextel Mexico was partially offset by
the Company's increase in ownership percentage during 1996 and $1.3 million of
additional amortization of the excess purchase price over net assets acquired in
its Nextel Philippines and additional Nextel Mexico investments. The decrease in
the net loss of Nextel Mexico was primarily due to foreign currency exchange
losses incurred in 1995 and interest expense reductions during 1996.
Other, net consisted of income of $400,000 in 1996 compared to expense of
$15.0 million in 1995. Other income recognized during 1996 primarily relates to
amounts recognized under technical services agreements with Nextel Philippines
and Shanghai CCT McCaw. Other expenses recognized during 1995 consists primarily
of a $15.0 million write-down of the Company's investment in Nextel Mexico,
which represented an other than temporary decline in value resulting from the
decline in the Mexican Peso.
Income tax expense decreased $700,000 to $1.4 million in 1996 from $2.1
million in 1995. The decrease in income tax expense is attributable to Nextel
Canmex's interest income decreasing during 1996 as a result of lower amounts of
cash and cash equivalents on hand throughout the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred historical net losses of approximately $104.5
million from January 1, 1995 through December 31, 1997. These losses resulted
from expenditures required for the development of the Company's wireless
communications networks, other start-up costs and the fact that as of December
31, 1997 only $13.0 million of consolidated revenues had been recorded. The
Company expects to continue to incur increasing losses and negative operating
cash flows as it continues to build-out and upgrade its existing wireless
communications networks. Through December 31, 1997, funds necessary to finance
the Company's activities have been provided to the Company primarily by its
parent, Nextel Communications, in the form of equity contributions and from the
net proceeds of the March 1997 Offering, and to a lesser extent from vendor
financing, including the existing Motorola Financings. Nextel Communications is
not obligated to provide any additional funding to the Company.
Net cash provided by (used in) operating activities for 1995, 1996 and 1997
approximated $6.1 million, $(2.9) million and $(16.5) million, respectively. In
1995 and 1996, cash from operating activities consisted mainly of interest
income generated from cash held by Nextel Canmex offset by selling, general and
administrative expenses of the Company. During 1997, cash used in operations
consisted primarily of selling, general and administrative expenses related to
the development and management of wireless communication networks in Brazil and
Mexico offset by interest income earned on the proceeds of the March 1997 Notes.
Net cash used in investing activities approximated $47.9 million, $72.3
million and $389.2 million, for 1995, 1996, and 1997, respectively. In 1995,
investing activities consisted of the purchase of SMR licenses and investments
in Nextel Mexico. During 1996, the Company's investments consisted primarily of
the purchase of analog infrastructure equipment and equity interests in Nextel
Mexico and Nextel Philippines. During 1997, cash used in investing activities
consisted of the purchase of ESMR infrastructure equipment, additional ownership
interests in Nextel Mexico and investments in marketable securities.
Net cash provided by financing activities approximated $1.6 million, $43.0
million and $512.4 million, for 1995, 1996, and 1997, respectively. In both 1995
and 1996, financing activities consisted mainly of capital contributions from
Nextel Communications, which were partially offset by repayment of amounts due
to Nextel Communications. During 1997, cash provided by the Company's financing
activities consisted mainly of proceeds from the issuance of the March 1997
Notes, offset by repayment of other long-term debt and amounts due to Nextel
Communications.
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The Company currently estimates its funding requirements for 1998 to be
approximately $810 million. These amounts consist primarily of the purchase of
switches and other equipment, the acquisition of cell sites, the cost of
constructing the network, loading subscribers, the acquisition of licenses and
investments and funding of operating losses. The Company currently estimates
that approximately $227 million of such requirements will be related to
expenditures in Brazil, $161 million in Argentina, $152 million in Mexico, $29
million in Peru and $74 million in the Philippines. See Part I, Item 1,
"Business -- 1998 Plan."
Pursuant to the Nextel Brazil Put, the Telcom Group has the right between
October 31, 2001 and November 1, 2003, to require Nextel Brazil to redeem such
shareholder's interest in Nextel Brazil at fair market value as determined
pursuant to an appraisal procedure. Motorola has the right to exercise the
Nextel Peru Put if Motorola owns at least 19% of the outstanding shares of
Nextel Peru and Nextel Peru does not purchase ESMR infrastructure equipment from
Motorola, provided that such ESMR infrastructure equipment is technologically
competitive and is offered to Nextel Peru by Motorola on competitive commercial
terms. Upon execution of the Philippine Partner Agreement, the Gotesco Group
will have the right, exercisable within nine months after the execution of the
Philippine Partner Agreement to put its 20% interest in Nextel Philippines to
the Company at a purchase price of approximately $9.4 million. Additionally, the
Company would be required to purchase approximately $17.6 million of the
Philippines Shareholders' loans that remain outstanding following execution of
the Philippines Partner Agreement. The Company anticipates that it would seek
any required funding to meet any such obligations through the issuance of
additional debt and equity securities at the Company and such Operating
Company's levels, future equity investments in such Operating Company by new
local partners and capital contributions from Nextel Communications in the form
of cash or common stock of Nextel Communications. Nextel Communications has no
obligation to provide any such financing in any form and there can be no
assurance that the Company or any of the other Operating Companies will be
successful in obtaining all of the amounts required to fund any Operating
Company Put obligations. The failure to fund any such obligation may have a
material adverse effect on the Company. In addition to the Operating Company
Puts, the Company and certain Operating Companies have certain deferred payment
obligations that will mature during or after 1998. Upon approval by Anatel, the
Company intends to exercise its rights under the Option Agreements and its
option with respect to the remaining 51% interest in MCS. The Company would be
required to pay approximately $4.6 million to exercise such options. Pursuant to
a services agreement entered into between Nextel Mexico and certain shareholders
of Grupo San Luis, in connection with the Company's purchase of Grupo San Luis'
equity interest in Nextel Mexico, Nextel Mexico has agreed to pay such
shareholders' aggregate consulting fees of approximately $6.6 million in January
1999 as consideration for regulatory advice and consulting services rendered to
Nextel Mexico. The Company is obligated to pay to Nextel Peru the remaining
purchase price of $20.9 million for its equity interest in Nextel Peru by July
30, 1998. Additionally, in connection with the Argentina Credit Facility, the
Company will agree to contribute at least $50 million of additional capital in
the form of cash or new equipment to Nextel Argentina by December 31, 1999.
MOTOROLA FINANCINGS AND BANK FACILITY
MOTOROLA MOU. In November 1996, Nextel Communications, Nextel
International and Motorola entered into the Motorola MOU regarding the provision
of equipment financing by Motorola including the Motorola Financings. Under the
Motorola MOU, Motorola agreed to provide an aggregate of up to $400 million in
vendor financing to Nextel Communications and Nextel International for the
worldwide purchase of iDEN equipment and services and ancillary products (such
as switches). In March 1997, Motorola and Nextel Communications entered into
term sheet increasing the maximum worldwide vendor financing available to Nextel
Communications and Nextel International to $650 million, with a maximum non-U.S.
amount outstanding of $400 million, subject to certain per country limits as
agreed to in the Motorola MOU. The Motorola MOU sets a limit of $125 million per
country (other than the United States and Canada) on the amount that may be
borrowed under the Motorola Financings. In June 1997 and October 1997, the
Company and Motorola entered into definitive agreements for financing the
purchase of up to $14.7 million and $125 million of equipment by Nextel
Philippines and Nextel Brazil, respectively.
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Commitments provided by Motorola to provide financing to any Operating
Company (other than Clearnet), including Nextel Brazil and Nextel Philippines,
count 100% against Motorola's $650 million aggregate commitment. Currently,
Motorola has not committed any financing to any Operating Company other than the
existing Motorola Financings described below. The Motorola MOU contemplates that
the loans under the Motorola Financings will bear interest at a rate of 2% to 4%
over prime rate, depending on the Operating Company placing the order and the
country in which such company is installing the iDEN equipment, and that such
loans could have a maturity of up to six years. Borrowings by an Operating
Company may be secured by all the assets and stock of such Operating Company and
it is expected that the Company will guarantee such borrowings on a pro rata
basis based on the equity interest of the Company in the Operating Company
incurring such borrowings.
Any amounts available to be borrowed by the Operating Companies under the
Motorola Financings will be reduced by any amounts borrowed by Nextel
Communications and its subsidiaries other than the Company and the Operating
Companies. Nextel Communications has committed to the Company that at least $95
million of the financing contemplated to be provided by Motorola pursuant to the
Motorola MOU will be available to the Company. On March 13, 1998, Nextel
Communications and its relevant subsidiaries entered into a new and increased
bank credit facility with respect to its United States operations, and upon the
consummation of such new facility, Nextel Communications made certain initial
borrowings thereunder for, among other purposes, the repayment in full of all
amounts then outstanding under its United States vendor financing arrangements
with, among other lenders, Motorola. Simultaneously with such repayment, Nextel
Communications terminated all related agreements and lines of credit with
Motorola that relate to the United States. Although Nextel Communications has
indicated no present intention to borrow any additional amounts from Motorola
pursuant to the Motorola MOU, Motorola and Nextel Communications are not
precluded in the future from entering into agreements to make such financing
available to Nextel Communications and its U.S. subsidiaries. Accordingly, there
can be no assurance that more than $95 million of the Motorola Financing will be
available to fund the Operating Companies' equipment purchases. In addition, to
the extent total amounts outstanding from Motorola to Nextel Communications and
its subsidiaries, including the Company and the Operating Companies (other than
Clearnet), plus requests for additional financing from Motorola by Nextel
Communications and its subsidiaries (other than the Company and the Operating
Companies) would exceed $650 million, the Company is required to repay or cause
to be repaid sufficient borrowings such that after giving effect to such
repayment, the total amount of loans outstanding from Motorola to Nextel
Communications and its subsidiaries, including the Company and the Operating
Companies (other than Clearnet), will not exceed $650 million. Nextel
Communications has agreed with the Company not to borrow more than $400 million
under the Motorola MOU.
PHILIPPINES MOTOROLA FINANCING. In June 1997, Nextel Philippines and
Motorola entered into the Philippines Motorola Financing, pursuant to which
Motorola committed to provide a maximum amount of $14.7 million in term loans to
Nextel Philippines to finance the purchase of infrastructure equipment and
services from Motorola. The Philippines Motorola Financing matures in June 1999
and provides for an annual interest rate of LIBOR plus 506 basis points.
Pursuant to the Philippines Motorola Financing the term loans are secured by a
first-priority lien on substantially all of Nextel Philippines' assets and a pro
rata guarantee of such financing by each of Nextel Philippines' shareholders,
including the Company. As of December 31, 1997 all of the $14.7 million had been
borrowed under the Philippine Motorola Financing.
BRAZIL MOTOROLA FINANCING. In October 1997, Nextel Brazil and Motorola
Credit entered into the Brazil Motorola Financing, pursuant to which Motorola
Credit agreed to provide up to $125 million in term loans to Nextel Brazil to
finance the purchase of infrastructure equipment and services from Motorola. The
Brazil Motorola Financing is repayable in semiannual installments over a period
of 42 months commencing June 30, 2000 and bears interest at an annual rate
periodically determined by the Company at either LIBOR plus 4.63% or the Prime
Rate plus 2.5%. Pursuant to the Brazil Motorola Financing, the loans are secured
by a first priority lien on substantially all of Nextel Brazil's assets, a
pledge of all of the stock of Nextel Brazil and its subsidiaries, including
Nextel S.A., and guarantees by the Company and Motorola International (which
indirectly holds a 5% equity interest in Nextel S.A.) of 93.9% and 6.1%,
respectively, of Nextel Brazil's obligations under such financing. Additionally,
approximately $70.3 million of the Company's cash, cash
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equivalents and marketable securities was restricted at October 31, 1997 for use
as future equity investments in Nextel Brazil and its subsidiaries. The Brazil
Motorola Financing contains certain financial covenants that require the
following: (i) a Fixed Charge Coverage Ratio of not less than 1.25:1.00 at the
end of each fiscal quarter; provided, however, if the stockholder guaranties
have not terminated, not less than 1.00:1.00; (ii) a net worth of greater than
$0 at the end of each fiscal quarter; (iii) EBITDA at the end of each quarter
ranging from $(10,000,000) at June 30, 1998 to $125,000,000 at June 30, 2002 and
thereafter; and (iv) minimum recurring revenues ranging from $10,000,000 at June
30, 1998 to $225,000,000 at December 31, 2001. As of December 31, 1997,
approximately $50.3 million had been drawn, and the remaining $74.7 million was
available for future borrowings under the Brazil Motorola Financing.
ARGENTINA CREDIT FACILITY. As of February 27, 1998, Nextel Argentina
entered into the Argentina Credit Facility, an $83 million senior secured credit
facility. In addition, Nextel Argentina and The Chase Manhattan Bank entered
into an agreement, dated February 27, 1998, pursuant to which the parties agreed
that the aggregate commitments under the Argentina Credit Facility shall
automatically be increased by up to $17 million to the extent that additional
lenders agree to provide such commitments. The Chase Manhattan Bank agreed to
use commercially reasonable efforts to syndicate the additional $17 million.
Borrowings under the Argentina Credit Facility are subject to finalizing certain
security arrangements as well as the satisfaction or waiver of certain other
conditions. Loans under the Argentina Credit Facility will bear interest at a
rate equal to either (i) the ABR plus 2.75% (ABR is the highest of the prime
rate, the base CD rate plus 1% and the federal funds rate plus 0.5%) or (ii) the
Eurodollar rate plus 3.75% (Eurodollar rate is the LIBO rate multiplied by the
statutory reserve rate). Tranche A loans will be used for financing the import
of capital goods; Tranche B loans will be used for financing the import of
capital goods, financing capital expenditures related to development, expansion
and upgrade of Nextel Argentina's network system, permitted spectrum
acquisitions and general working capital needs. In addition, Nextel Argentina
may request additional term loans (the "Incremental Facility Loans") from $10
million to $50 million, provided that Nextel International matches such loans on
a one-to-one basis. The maximum amount available under the Incremental Facility
Loans is $50 million. The Argentina Credit Facility will be secured by a pledge
of the stock of Nextel Argentina and a first priority lien on the assets of
Nextel Argentina and its subsidiaries and each of Nextel Argentina's material
subsidiaries will guarantee the Argentina Credit Facility. The loans under the
Argentina Credit Facility will be repaid in quarterly installments beginning
September 30, 2000 and ending March 31, 2003. The first nine installments will
be equal to 1/18 of the then outstanding balance and the final installment will
be in an amount equal to the then-outstanding balance. As a condition to the
Argentina Credit Facility, Nextel International will enter into a Capital
Subscription Agreement whereby it will agree to make aggregate equity
contributions in cash or equipment to Nextel Argentina as follows: $115.5
million on or before June 30, 1998, $133 million on or before December 31, 1998,
$140.1 million on or before June 30, 1999 and $148 million on or before December
31, 1999. Nextel Argentina will be required to make mandatory prepayments equal
to 50% of Excess Cash Flow commencing with the fiscal year ending December 31,
2000. Borrowings may be made in minimum amounts of $5 million and maximum
amounts of (i) $35 million until execution by Nextel Argentina of an
interconnect agreement with an Argentine carrier and (ii) $45 million until
completion of the interconnect contemplated thereby. The Argentina Credit
Facility also contains certain financial and operating covenants.
FUTURE CAPITAL NEEDS AND RESOURCES
The Company believes that the net proceeds from the March 1998 Offering,
together with available cash, cash equivalents and marketable securities and
borrowings expected to be available under the existing Motorola Financings and
the Argentina Credit Facility, will be sufficient to fund the Company's current
operations, including the planned expansion of its existing operations, during
1998; however, there can be no assurance that such funds will be sufficient. If,
among other things, the Company's plans change, its assumptions regarding its
funding needs associated with the further build-out, expansion and enhancement
of its ESMR network at the Operating Company level prove to be inaccurate, the
other shareholders in certain of the Operating Companies do not fund their
expected capital requirements, it consummates acquisitions or investments in
addition to those currently contemplated or at higher prices than currently
contemplated, if it increases its existing equity ownership interests in certain
of the Operating Companies beyond those currently
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contemplated increases, it experiences growth in its business or subscriber base
greater than that which was anticipated in developing the 1998 Plan, it
experiences unanticipated costs or competitive pressures, the Operating
Companies are unable to access funds under the existing Motorola Financings and
or the Argentina Credit Facility, or the net proceeds from the March 1998
Offering together with any other funds available to the Company and the
Operating Companies or any other borrowings otherwise prove to be insufficient
to meet cash needs through 1998, the Company may be required to seek additional
capital sooner than currently anticipated. The availability of borrowings under
the existing Motorola Financings and under the Argentina Credit Facility are
subject to the satisfaction or waiver of certain conditions. The Company will
also require significant additional capital in years subsequent to 1998 to fund
the further build-out, expansion and enhancement of its ESMR networks, to fund
operating losses and for other purposes. To the extent the Company's then
existing financing sources are insufficient to meet such needs, the Company may
seek to raise such additional capital from public or private equity or debt
sources. There can be no assurance that the Company will be able to raise such
capital on satisfactory terms, if at all. Additionally, the Company and the
certain of the Operating Companies may incur indebtedness only in compliance
with the terms of covenants contained in the Existing Indentures. See Part I,
Item 1, "Business -- Risk Factors -- Significant Capital Requirements for
Operations" and "-- Forward-Looking Statements."
In the future, the Company may consider obtaining financing from various
sources, including vendor financing provided by equipment suppliers (including
the Motorola Financings), project financing from commercial banks and
international agencies such as International Finance Corporation and Overseas
Private Investment Corporation, bank lines of credit and sales of equity and
debt issued by the Operating Companies and/or the Company. To the extent the
Company issues debt, its leverage and debt service obligations will increase.
There can be no assurance that the Company will be able to raise such capital on
satisfactory terms, if at all.
Nextel International intends to structure its future capital contributions
to the Operating Companies as equity contributions and/or loans and thereafter
to rely on the payment of dividends and/or interest and principal payments as a
means of obtaining cash from the Operating Companies. The Company will evaluate
on an on-going basis which means of contributing cash to the Operating Companies
is most effective.
The Company owns 100% of Nextel Mexico and Nextel Argentina, 81% of Nextel
Brazil (or approximately 77% of Nextel S.A.) and 70.1% of Nextel Peru. The
Company's other assets consist of minority ownership interests in Nextel
Philippines and passive minority investment stakes in the Shanghai GSM System
and Clearnet and as of February 28, 1998, cash and cash equivalents of
approximately $96.7 million consisting primarily of net cash proceeds remaining
from the March 1997 Offering. Even though the Company participates in the
management of the Operating Companies (except in China and Canada) and has
certain contractual rights designed to protect its interests as a minority
shareholder, it cannot control the outcome of matters submitted to the
shareholders of the Operating Companies in which it has less than a majority
interest. In addition, the Company may be unable to access the cash flow of its
affiliated companies because (i) it does not have the requisite control to cause
such entities to pay dividends and (ii) substantially all of such entities are
parties to or expected to become parties to vendor financing or other borrowing
agreements that severely restrict the payment of dividends, and such entities
are likely to continue to be subject to such restrictions and prohibitions for
the foreseeable future. The existing Motorola Financings and the Argentina
Credit Facility restrict the payment of dividends to the Company by the
Operating Companies that have debt outstanding thereunder. Any future vendor or
bank financings are likely to include similar covenants restricting the payment
of dividends. See Part I, Item 1, "Business -- Risk Factors -- Substantial
Indebtedness; Ability to Service Debt; Refinancing Risks."
INFLATION AND FOREIGN CURRENCY EXCHANGE
The net monetary assets of the Company's subsidiaries are subject to
foreign currency exchange risks since they are maintained in local currency.
Certain of the Operating Companies conduct business in countries in which the
rate of inflation is significantly higher than that of the United States. The
Company will attempt to protect its earnings from inflation and possible
currency devaluation by trying to periodically adjust the relevant Operating
Companies' prices in local currencies and in some cases setting such prices in
direct
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relation to the U.S. dollar. However, there can be no assurance that any
significant devaluation against the U.S. dollar could be offset, in whole or in
part, by a corresponding price increase. While the Company routinely assesses
its foreign currency exposure, the Company has not entered into any hedging
transactions.
The countries in which the Operating Companies now conduct business
generally do not restrict the repatriation or conversion of local or foreign
currency. There can be no assurance, however, that this will be the case in each
market that the Company may enter in the future or that this situation will
continue in the Company's existing markets. The Operating Companies are all
directly affected by their respective countries' governmental, economic, fiscal
and monetary policies and other political factors. See Part I, Item 1,
"Business -- Risk Factors -- Currency Risks and Exchange Controls."
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1997, there were the following net operating losses
("NOLs") at the Operating Company level: (i) $13.7 million in Brazil; (ii) $20.0
million in Argentina and (iii) $67.8 million in Mexico. Such NOLs are only
available to be utilized as a potential future reduction of taxes at the
Operating Company level and their use in any one year may be limited by the
Operating Companies' ability to generate sufficient taxable income.
IMPACT OF YEAR 2000 ISSUE
The Company and Nextel Communications are evaluating the Company's computer
systems and software to determine whether they will function properly with
respect to dates in the year 2000 and thereafter. Management believes that most
of the Company's computer systems and software are Year 2000 compliant. However,
the Company cannot assess the impact of the Year 2000 on operators of PSTNs or
other (such as electric and other utility) service providers in the countries in
which the Company operates. Because the Company's systems will be interconnected
with those of the relevant PSTN and will be dependent upon the systems of other
service providers, any disruption of operations in the computer programs of the
relevant PSTN or of such service providers would likely have an impact on the
Company's systems in such countries and there can be no assurance that such
impact will not have a material adverse effect on the Company's operations in
such countries.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are filed under this
Item are filed under Part IV, Item 14(a)(1) of this Report. The financial
statement schedules required under Regulation S-X are filed under Part IV, Item
14(a)(2) of this Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- ---- ---------
<S> <C> <C>
Daniel F. Akerson................ 49 Chairman of the Board of Directors
Keith D. Grinstein............... 37 President, Chief Executive Officer and Director
Heng-Pin Kiang................... 49 Vice President and General Counsel
William S. Roberts............... 43 Vice President of Country Operations
David E. Rostov.................. 32 Vice President and Chief Financial Officer
Thomas J. Truesdale.............. 39 Vice President of International Operations
Brian A. Vincent................. 39 Vice President of Business Development
C. James Judson.................. 53 Vice Chairman of the Board of Directors
Timothy M. Donahue............... 49 Director
Craig O. McCaw................... 48 Director
Steven M. Shindler............... 35 Director
Dennis M. Weibling............... 47 Director
</TABLE>
Daniel F. Akerson has served as Chairman of the Board of the Company since
March 1996. Mr. Akerson is also Chairman of the Board and Chief Executive
Officer of Nextel Communications, positions he has held since March 1996. From
June 1993 to March 1996, Mr. Akerson served as a general partner of Forstmann
Little & Co., a private investment firm ("Forstmann Little"), and also held the
positions of Chairman of the Board and Chief Executive Officer of General
Instrument Corporation, a technology company acquired by Forstmann Little. From
1983 to 1993, Mr. Akerson held various senior management positions with MCI
Communications Corporation, including President and Chief Operating Officer. Mr.
Akerson currently serves as a director of American Express Company and America
Online, Inc. Mr. Akerson received a B.S. from the United States Naval Academy
and a M.S. from the London School of Economics.
Keith D. Grinstein has served as President, Chief Executive Officer and as
a director of the Company since January 1996. From January 1991 to December
1995, Mr. Grinstein was President and Chief Executive Officer of the aviation
communications division of AT&T Wireless Services, Inc. (formerly known as McCaw
Cellular Communications, Inc. ("McCaw Cellular")). Mr. Grinstein held a number
of positions at McCaw Cellular and its subsidiaries, including Vice President,
General Counsel and Secretary of LIN Broadcasting Company, a subsidiary of McCaw
Cellular, and Vice President and Assistant General Counsel of McCaw Cellular.
Mr. Grinstein received a B.A. from Yale University and a J.D. from Georgetown
University. Mr. Grinstein currently is a director of Clearnet.
Heng-Pin Kiang has served as Vice President and General Counsel of the
Company since January 1996. From September 1984 to December 1995, Mr. Kiang was
a partner in the Perkins Coie law firm. Mr. Kiang received a B.S.E. in Chemical
Engineering from Princeton University and a J.D. from Columbia University.
William S. Roberts has served as Vice President of Country Operations since
November 1996. From 1983 to November 1996, Mr. Roberts held various management
positions with BellSouth Corporation ("BellSouth"), an international
telecommunications services company, most recently as the Chief Financial
Officer and the Chief Operating Officer of BellSouth Investment S.A. (Chile), a
Chilean investment and services company owned by BellSouth. Prior to joining
BellSouth, Mr. Roberts was a senior internal auditor for a satellite
communications company. Mr. Roberts is a certified public accountant and
received a B.A. in accounting from the University of West Florida.
David E. Rostov has served as Vice President and Chief Financial Officer
since joining the Company in January 1996. From 1992 to 1996, Mr. Rostov held
various positions at McCaw Cellular, most recently as Assistant Vice President
in the Development Group. Mr. Rostov was a financial analyst with Goldman,
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Sachs & Co. from 1987 to 1989. Mr. Rostov received a B.A. from Oberlin College
and an M.B.A. and M.A. in Public Policy from The University of Chicago.
Thomas J. Truesdale has served as Vice President of International
Operations since September 1997. Prior to his employment with the Company, Mr.
Truesdale was employed by Nextel Communications as Vice President
Finance/Operations from March 1997, General Manager from November 1996 and Vice
President Operations from November 1994. Prior to his employment with Nextel
Communications, Mr. Truesdale was employed by AirTouch Communications in various
positions including Director Operations, Director Revenue Assurance, Director
Marketing Operations and Director MIS. Mr. Truesdale holds an M.S. in Business
Administration from Humboldt University.
Brian A. Vincent has served as Vice President of Business Development.
Mr.Vincent joined the Company in January 1996. From 1986 to 1995, Mr. Vincent
served as Vice President of Worldwide Marketing Operations at Intermec
Corporation, a leading manufacturer of handheld data collection computers and
on-premise wireless communication networks. Mr. Vincent received a B.A. from the
University of California at Berkeley and an M.B.A. from the University of
Washington. Mr. Vincent currently is a director of Clearnet.
C. James Judson has served as a director of the Company since February
1995. Mr. Judson is Vice President, Secretary and General Counsel of Eagle
River, Inc., a company formed to make strategic investments in
telecommunications ventures ("Eagle River"), a position he has held since
January 1995. From 1969 to January 1995, Mr. Judson was a partner in the Davis
Wright Tremaine law firm. Mr. Judson received a B.A. and a L.L.B. from Stanford
University.
Timothy M. Donahue has served as a director of the Company since August
1997. Mr. Donahue has served as President of Nextel Communications since
February 1, 1996 and has served as a director of Nextel Communications since May
1996. On February 29, 1996, Mr. Donahue was elected to the additional position
of Chief Operating Officer of Nextel Communications. From 1986 to January 1996,
Mr. Donahue held various senior management positions with AT&T Wireless
Services, Inc., most recently Regional President for the Northeast.
Craig O. McCaw served as a director of the Company from February 1995 until
the acquisition of the Company by Nextel Communications in August 1995. Mr.
McCaw was reelected to the Company's board of directors in February 1997. From
February 1995 to August 1995, Mr. McCaw served as Chairman of the Board and
Chief Executive Officer of Eagle River, the indirect majority owner of Digital
Radio, L.L.C., a company formed for the purpose of making an equity investment
in Nextel Communications. From March 1990 to November 1994, Mr. McCaw served as
Chairman of the Board and Chief Executive Officer of LIN Broadcasting Company.
From 1974 to September 1994, Mr. McCaw served as Chairman of the Board and Chief
Executive Officer of McCaw Cellular, which was sold to AT&T Corporation in
September 1994. Mr. McCaw serves as a director of Nextel Communications and as
Chairman of the Operations Committee of the Nextel Communications Board. Mr.
McCaw is an appointee to the President's National Security Telecommunications
Advisory Committee.
Steven M. Shindler has served as a director of the Company since May 1997.
Mr. Shindler is Vice President and Chief Financial Officer of Nextel
Communications, a position he has held since May 1996. Between 1987 and 1996,
Mr. Shindler was an officer with Toronto Dominion Bank where most recently he
was a Managing Director in its Communications Finance Group.
Dennis M. Weibling has served as a director of the Company since February
1995. From October 1995 to March 1996, Mr. Weibling served as Nextel
Communications' acting Chief Executive Officer. Mr. Weibling is President of
Eagle River, a position he has held since 1993. From 1981 to 1993, Mr. Weibling
was a shareholder of Clark, Nuber and Co., P.S., a public accounting firm in
Bellevue, Washington. Mr. Weibling received a B.A. from Wittenberg University
and a J.D. from the University of Nebraska. Mr. Weibling is a director of Nextel
Communications and is a member of the Operations Committee, Audit Committee and
Compensation Committee of the Nextel Communications Board. He is also a director
of NextLink Communications, Inc., a facilities-based local exchange carrier and
majority-owned subsidiary of Eagle River, Teledesic Corporation and Cable Plus,
Inc.
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COMMITTEES OF THE BOARD OF DIRECTORS
The Company established an audit committee in November 1997. During 1997,
no meetings of the audit committee were held. The Board of Directors of the
Company has no other standing committees.
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
COMPENSATION OF EXECUTIVE OFFICERS
The following table and discussion summarize the compensation earned by the
Company's President and Chief Executive Officer and the four other most highly
compensated executive officers of the Company, who earned more than $100,000 in
salary and bonuses (collectively, the "Named Executive Officers") for services
rendered in all capacities to the Company during the fiscal years ended December
31, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM(1)
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------
--------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER(2)
SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- --------------------------- ---- ------- ------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Keith D. Grinstein........ 1997 180,000 60,000 -- 540,000/-- 3,200
President and Chief 1996 150,000 -- -- 50,000/400,000 2,500
Executive Officer
Heng-Pin Kiang............ 1997 160,940 52,500 -- 290,000/-- 5,572
Vice President and 1996 150,000 -- -- 25,000/250,000 3,625
General Counsel
Brian A. Vincent.......... 1997 152,940 56,000 -- 145,000/-- 2,714
Vice President of 1996 140,000 -- -- 10,000/100,000 2,450
Business Development
David E. Rostov........... 1997 132,940 50,000 -- 145,000/-- 4,868
Vice President and Chief 1996 94,744(3) -- -- 15,000/100,000 1,895
Financial Officer
William S. Roberts........ 1997 170,000 -- -- 130,000/-- 6,200
Vice President of Country 1996 20,705(4) 40,000 -- --/75,000 --
Operations
</TABLE>
- ---------------
(1) Options were granted pursuant to the Nextel International 1997 Stock Option
Plan and the Nextel Communications Incentive Equity Plan. Options vest over
a four-year period and become exercisable, subject to the provisions of each
plan, for shares of the Company's common stock (the "Company's Common
Stock") and Nextel Communications Class A Common Stock, respectively. Stock
appreciation rights ("SARs") were granted pursuant to the Nextel
International Stock Appreciation Rights Plan (the "SAR Plan"). All but two
SAR holders of the then outstanding SARs, including all of the members of
the senior management team, agreed to exchange their SARs for options
granted pursuant to the Company's 1997 Stock Option Plan. See "-- Benefit
Plans -- Nextel International Stock Appreciation Rights Plan."
(2) Comprised of the Company's contributions to the Nextel Communications
Section 401(k) Plan and the value received from purchases under the Nextel
Communications Stock Purchase Plan which reflect the difference between the
purchase price (which is the lower of 85% of market value at the beginning
or the end of each quarter) and the market value.
(3) Reflects salary paid from January 22, 1996 to December 31, 1996.
(4) Reflects salary paid from November 18, 1996 to December 31, 1996.
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<PAGE> 60
OPTION GRANTS IN FISCAL YEAR 1997
The following table sets forth certain information with respect to options
exercisable for shares of the Company's Common Stock and Nextel Communications
Class A Common Stock granted to the Named Executive Officers during fiscal year
1997.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE OR GRANT DATE
OPTIONS GRANTED FISCAL YEAR BASE PRICE(2) EXPIRATION PRESENT VALUE
NAME (#)(1) (%) ($/SHARE) DATE ($)(3)
---- --------------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Keith D. Grinstein
NI Options.................... 500,000 30.85 10.00 8/15/07 3,295,000
NC Options.................... 40,000 .66 15.13 2/12/07 398,400
Heng-Pin Kiang
NI Options.................... 275,000 16.96 10.00 8/15/07 1,812,220
NC Options.................... 15,000 .25 15.13 2/12/07 149,400
Brian A. Vincent
NI Options.................... 130,000 8.02 10.00 8/15/07 856,700
NC Options.................... 15,000 .25 15.13 2/12/07 149,400
David E. Rostov
NI Options.................... 130,000 8.02 10.00 8/15/07 856,700
NC Options.................... 15,000 .25 15.13 2/12/07 149,400
William S. Roberts
NI Options.................... 110,000 6.79 10.00 8/15/07 724,900
NC Options.................... 20,000 .33 15.13 2/12/07 199,200
</TABLE>
- ---------------
(1) Options were granted pursuant to the Nextel International 1997 Stock Option
Plan ("NI Options") and pursuant to the Nextel Communications Incentive
Equity Plan ("NC Options"). NI Options vest over a four year period with
1/48(th) of the option grant vesting at the end of each month of employment
with the Company. Vested NI Options may be exercised when an optionee
becomes 50% vested with respect to a single option grant, provided that no
more than 20% of the options conveyed in a specific grant may be exercised
in any fiscal year of the Company. NC Options granted vest over a four-year
period, becoming exercisable with respect to 25% of the shares on each of
the first four anniversary dates following the date of grant.
(2) The Company's Common Stock is not registered or publicly traded and
therefore a public market price for the Company's Common Stock is not
available. The base price per share is based on the Board of Directors'
estimate of fair market value at the time of grant. The actual value, if
any, an employee may realize will depend on the excess of fair market value
of the Company's Common Stock over the base price on the date the option is
exercised.
(3) The Company used the Black-Scholes pricing model to estimate the present
value of the options at date of grant.
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<PAGE> 61
OPTION EXERCISES IN FISCAL YEAR 1997 AND YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of
options during the year ended December 31, 1997 and unexercised option values as
of the fiscal year ended December 31, 1997 with respect to each of the Named
Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED ON VALUE (#) ($)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Keith D. Grinstein
NI Options................. -- -- -- 500,000 -- --
NC Options................. -- -- 25,000 65,000 259,375 694,375
Heng-Pin Kiang
NI Options................. -- -- -- 275,000 -- --
NC Options................. -- -- 12,500 27,500 129,688 292,813
Brian A. Vincent
NI Options................. -- -- -- 130,000 -- --
NC Options................. -- -- 2,500 22,500 27,188 244,688
David E. Rostov
NI Options................. -- -- -- 130,000 -- --
NC Options................. -- -- 3,750 26,250 40,781 285,469
William S. Roberts
NI Options................. -- -- -- 110,000 -- --
NC Options................. -- -- -- 20,000 -- 217,500
</TABLE>
EMPLOYMENT AGREEMENTS
In November 1995, the Company entered into an employment agreement with Mr.
Grinstein providing for his employment as President and Chief Executive Officer
which automatically renewed on July 1, 1997. The agreement with Mr. Grinstein
terminates on June 30, 1998. The agreement provides for a base salary of
$150,000 per year, subject to an annual performance evaluation (plus performance
bonuses based on the achievement of mutually determined objectives).
The Company also entered into an employment agreement with Mr. Kiang in
November 1995 providing for his employment as Senior Vice President and General
Counsel which automatically renewed on July 1, 1997. The agreement with Mr.
Kiang terminates on June 30, 1998. The agreement provides for a base salary of
$150,000 per year, subject to an annual performance review (plus performance
bonuses based on the achievement of mutually determined objectives).
In January 1996, the Company entered into an employment agreement with Mr.
Vincent providing for his employment as Senior Vice President of Business
Development which automatically renewed on January 1, 1998 and is renewable for
subsequent one-year terms. Either party may terminate the agreement upon 60
days' written notice. The agreement provides for a base salary of $140,000 per
year, subject to an annual performance evaluation (plus performance bonuses
based on the achievement of certain objectives).
In January 1996, the Company entered into an employment agreement with Mr.
Rostov providing for his employment as Vice President and Chief Financial
Officer which automatically renewed on January 12, 1998 and is renewable for
subsequent one-year terms. Either party may terminate the agreement upon 60
days'
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<PAGE> 62
written notice. The agreement provides for a base salary of $100,000 per year,
subject to an annual performance evaluation (plus performance bonuses based on
the achievement of certain objectives).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not currently have a compensation
committee. The Company's Board of Directors is responsible for executive
compensation matters. During 1996, Mr. Grinstein served on the Company's Board
of Directors and as Chief Executive Officer and President of the Company.
BENEFIT PLANS
NEXTEL COMMUNICATIONS INCENTIVE EQUITY PLAN. All officers, key employees
of and consultants to Nextel Communications and its subsidiaries, including
Nextel International, are eligible to participate in the Nextel Incentive Equity
Plan (the "Incentive Equity Plan"). The Compensation Committee of the Nextel
Communications Board (the "Nextel Communications Compensation Committee") may
grant each eligible participant options entitling the optionee to purchase
shares of Nextel Communications Class A Common Stock at a price equal to or
greater than market value on the date of grant, except that the option price of
an option that is granted in exchange for the surrender and cancellation of an
option to purchase shares of another corporation that has been acquired by the
Nextel Communications or one of its subsidiaries ("Replacement Options") or
options granted to a consultant may be less than the market value on the date of
grant. Replacement Options and options granted to consultants are otherwise
subject to the same terms, conditions and discretion as other options granted
under the Incentive Equity Plan.
The option price is payable at the time of exercise (i) in cash, (ii) by
the transfer to Nextel Communications of nonforfeitable, nonrestricted shares of
Nextel Communications Class A Common Stock that are already owned by the
optionee and have a value at the time of exercise equal to the option price,
(iii) with any other legal consideration the Nextel Communications Compensation
Committee may deem appropriate or (iv) by any combination of the foregoing
methods of payment. Any grant of options may provide for deferred payment of the
option price from the proceeds of sale through a bank or broker on the date of
exercise of some or all of the shares of Nextel Communications Class A Common
Stock to which the exercise relates.
No option may be exercised more than 10 years from the date of grant. Each
option must specify the vesting period and other terms for the exercise of such
option and may provide for the earlier exercise of the options in the event of a
change in control of Nextel Communications or other similar transaction or
event. Options granted under the Incentive Equity Plan may be designated as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or may be designated as options
that are not intended to so qualify.
The Nextel Communications Compensation Committee may also grant eligible
participants in the Incentive Equity Plan Appreciation Rights, Restricted
Shares, Deferred Shares, Performance Shares or Performance Units (each as
defined in the Incentive Equity Plan). The Nextel Communications Compensation
Committee must specify at the time of grant the vesting period and other terms
of any such award.
No option, appreciation right or other "derivative security" within the
meaning of Rule 16b-3 under the Exchange Act is transferable by a recipient
except by will or the laws of descent and distribution. Options and Appreciation
Rights may not be exercised during a recipient's lifetime except by the
recipient or, in the event of his or her incapacity, by his or her guardian or
legal representative acting in a fiduciary capacity on behalf of the recipient
under state law and court supervision. The Nextel Communications Compensation
Committee may specify at the date of grant that all or any part of the shares of
Nextel Communications Class A Common Stock that are to be issued or transferred
by Nextel Communications pursuant to the Incentive Equity Plan shall be subject
to further restrictions on transfer.
The Incentive Equity Plan is administered by the Nextel Communications
Compensation Committee, which consists of not less than three nonemployee
directors who are "disinterested persons" within the meaning of Rule 16b-3 under
the Exchange Act. The Nextel Communications Compensation Committee
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<PAGE> 63
may make grants to participants under any or a combination of all of the various
categories of awards that are authorized under the Incentive Equity Plan and may
provide for special terms for awards to participants who either are foreign
nationals or are employed by or provide consulting services to Nextel
Communications or any of its subsidiaries outside of the United States, as the
Nextel Communications Compensation Committee may consider necessary or
appropriate to accommodate differences in local law, tax policy or custom.
The Incentive Equity Plan may be amended from time to time by the Nextel
Communications Compensation Committee, but without further approval by the
stockholders of Nextel Communications no such amendment may (i) increase the
aggregate number of shares of Nextel Communications Class A Common Stock that
may be issued or transferred and covered by outstanding awards, or increase the
aggregate number of Performance Units that may be granted, thereunder or (ii)
otherwise cause Rule 16b-3 under the Exchange Act to cease to be applicable to
the Incentive Equity Plan.
NEXTEL COMMUNICATIONS STOCK PURCHASE PLAN. All employees of Nextel
Communications and its subsidiaries, including Nextel International, who are
customarily employed for more than 20 hours per week are eligible to elect to be
granted options under the Nextel Communications Stock Purchase Plan (the "Stock
Purchase Plan"). Section 423 of the Code, however, prohibits the granting of an
option to any employee who would own stock possessing five percent or more of
the total combined voting power or value of all classes of stock of Nextel
Communications or any of its subsidiaries following the granting of the option.
For purposes of the foregoing, shares of stock that are subject to outstanding
options or other vested or contingent rights to acquire the same are deemed to
be owned by the optionee.
The option price per share upon exercise of an option granted under the
Stock Purchase Plan is an amount equal to 85 percent of the lesser of (i) the
fair market value of a share of Nextel Communications Class A Common Stock on
the date of grant or (ii) the fair market value of a share of Nextel
Communications Class A Common Stock on the date of exercise. For purposes of the
Stock Purchase Plan, "fair market value" means the closing price of the Nextel
Communications Class A Common Stock on the Nasdaq National Market on the last
trading date preceding the date of the grant or the date of exercise, as the
case may be.
The option price is payable by the optionee on the date of exercise with
funds accumulated through payroll withholding over the term of the option or, at
the discretion of the Nextel Communications Compensation Committee, with funds
paid to Nextel Communications by the optionee in a lump sum on or before the
date of exercise. An optionee may elect to have not less than one percent and
not more than ten percent of his or her "basic compensation," which includes
base salary and any commissions paid pursuant to an ongoing sales incentive
compensation program but does not include cash bonuses or any form of noncash
compensation, withheld from payroll and applied to the purchase of Nextel
Communications Class A Common Stock upon the exercise of options granted under
the Stock Purchase Plan.
The maximum number of shares of Nextel Communications Class A Common Stock
that an optionee may purchase upon exercise of an option granted under the Stock
Purchase Plan is equal to ten percent of his or her basic compensation divided
by an amount equal to 85 percent of the lesser of (i) the fair market value of a
share of Nextel Communications Class A Common Stock on the date of grant or (ii)
the fair market value of a share of Nextel Communications Class A Common Stock
on the date of exercise, subject to further limitations imposed by Section 423
of the Code. Section 423 of the Code provides that, among other things, the
right of an optionee to purchase stock under all "employee stock purchase plans"
(as defined in Section 423 of the Code) of a corporation and its subsidiaries
may not accrue at a rate that exceeds $25,000 of fair market value (determined
at the time of grant) for each calendar year in which the option is outstanding
at any time.
Options granted under the Stock Purchase Plan may have terms of not less
than three months and not more than one year, as determined by the Nextel
Communications Compensation Committee in its sole discretion, provided that all
options granted pursuant to any particular offering under the Stock Purchase
Plan must have the same term for all optionees. The first day of the relevant
term of an option granted under the Stock Purchase Plan is the grant date with
respect to such option, and the date of exercise of an option granted
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<PAGE> 64
under the Stock Purchase Plan is the last day of its term. No option granted
under the Stock Purchase Plan may be transferred by the optionee.
The Stock Purchase Plan is administered by the Nextel Communications
Compensation Committee, which may establish such policies or procedures and
adopt such rules for the operation and administration of the Stock Purchase Plan
as it deems appropriate. Nextel Communications may engage the services of a
professional plan administrator on such terms and conditions as the Nextel
Communications Compensation Committee deems appropriate for the purposes of
establishing and maintaining custodial accounts and holding shares of Nextel
Communications Class A Common Stock acquired by employees upon the exercise of
options granted under the Stock Purchase Plan and otherwise operating the Stock
Purchase Plan. The Nextel Communications Compensation Committee also has the
authority to promulgate terms and conditions (to the extent not inconsistent
with the terms and conditions prescribed in the Stock Purchase Plan) applicable
to grants made under the Stock Purchase Plan, including, without limitation,
holding periods for shares of Nextel Communications Class A Common Stock
purchased upon the exercise of an option granted under the Stock Purchase Plan
beyond those required to obtain favorable tax treatment under Section 423 of the
Code and sanctions for failing to comply with the terms and conditions
applicable to particular grants (in addition to those otherwise imposed by law
or the terms of the Stock Purchase Plan).
The Stock Purchase Plan will terminate the tenth anniversary of its
adoption by the Nextel Communications Board, unless sooner terminated by the
Nextel Communications Board, and no options will thereafter be granted
thereunder. The Stock Purchase Plan may be amended from time to time by the
Nextel Communications Board of Directors, but without further approval by the
stockholders of Nextel Communications, no such amendment may (i) increase the
aggregate number of shares of Nextel Communications Class A Common Stock covered
by the Stock Purchase Plan, except for adjustments to reflect the effects of
stock dividends, stock splits, combinations of shares or other changes in the
capital structure of Nextel Communications, (ii) permit the granting of options
under the Stock Purchase Plan to persons other than employees of Nextel
Communications and its subsidiaries who are customarily employed for more than
20 hours per week, (iii) cause options granted under the Stock Purchase Plan to
fail to satisfy any of the conditions of Section 423 of the Code or (iv) cause
Rule 16b-3 under Section 16(b) of the Exchange Act (or any successor rule to the
same effect) to cease to be applicable to the Stock Purchase Plan.
NEXTEL INTERNATIONAL STOCK APPRECIATION RIGHTS PLAN. The Company granted
to selected employees and agents SARs in accordance with the Company's SAR Plan.
The surrender of a SAR, in accordance with the terms of the SAR Plan, entitles
the holder thereof to receive the increase in fair market value of one share of
the Company's Common Stock between the date of its grant and the date of
surrender. The SAR Plan contains provisions establishing how the fair market
value of the Company's Common Stock will be determined. SARs vest on a monthly
basis over a four-year period and once vested may be surrendered by a holder in
installments of 20% per year; provided, however, that no more than a maximum of
$5 million in the aggregate will be paid out in any one year to all SAR holders.
Certain of the senior officers of the Company were granted rights whereby their
SARs would have vested automatically upon a change of control of the Company (as
defined in the SAR Plan).
On June 23, 1997, the Company adopted the Company's 1997 Stock Option Plan
(the "1997 Stock Option Plan") and approved a plan to terminate the SAR Plan.
Each holder of SARs granted previously under the SAR Plan was given the option
to exchange his or her SARs for stock options to be granted under the 1997 Stock
Option Plan. The Company agreed to grant additional stock options to certain SAR
holders who exchanged their SARs for stock options as an inducement to such SAR
holders. All but two SAR holders, including all of the Company's senior
officers, agreed to exchange their SARs for options granted under the 1997 Stock
Option Plan. With respect to the SAR holders who elected not to exchange their
SARs for stock options, the Company continues to be obligated by the terms and
conditions of the SAR agreements previously entered into with such holders.
NEXTEL INTERNATIONAL STOCK OPTION PLAN. All employees, officers,
directors, agents, independent contractors of and advisors and consultants to
Nextel International, its subsidiaries and affiliates are eligible to
participate in the 1997 Stock Option Plan. The Nextel International Board of
Directors or a committee
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<PAGE> 65
designated thereby (the "Plan Administrator") may grant each eligible
participant options entitling the optionee to purchase shares of Nextel
International common stock at a price equal to at least 100% of the market value
on the date of grant. A maximum of 1,825,000 shares of the Company's Common
Stock is currently available for issuance under the 1997 Stock Option Plan.
The option price is payable at the time of exercise (i) in cash, (ii) by
the transfer to the Company of shares of the Company's Common Stock already
owned by the optionee for at least six months and having a value at the time of
exercise equal to the aggregate option exercise price, (iii) with any other
legal consideration the Plan Administrator may deem appropriate or (iv) at the
discretion of the Plan Administrator, by any combination of the foregoing
methods of payment.
No option may be exercised more than 10 years from the date of grant. Each
option must specify the vesting period and other terms for the exercise of such
option. Options granted under the 1997 Stock Option Plan vest over four years
but may not be exercised prior to two years following the date of grant. Options
granted under the 1997 Stock Option Plan may be designated as "incentive stock
options" within the meaning of Section 422 of the Code, or may be designated as
options that are not intended to so qualify.
Each optionee has the right to sell any shares acquired pursuant to the
exercise of an option to the Company or an affiliate of the Company after such
shares have been held for at least six months. The sale price for such shares is
the fair market value as of the date of sale. Additionally, the Company has a
right of first refusal on any proposed sale of shares acquired pursuant to the
exercise of an option. Options are not transferable by a recipient except by
will or the laws of descent and distribution. Options may not be exercised
during a recipient's lifetime except by the recipient or, in the event of his or
her incapacity, by his or her guardian or legal representative acting in a
fiduciary capacity on behalf of the recipient under state law and court
supervision. The Plan Administrator may specify at the date of grant that all or
any part of the shares of the Company's Common Stock are to be issued pursuant
to the 1997 Stock Option Plan shall be subject to further restrictions on
transfer.
The Plan Administrator may provide for special terms for awards to
participants who either are foreign nationals or are employed by or provide
consulting services to the Company or any of its subsidiaries outside of the
United States, as the Plan Administrator may consider necessary or appropriate
to accommodate differences in local law, tax policy or custom. Certain of the
senior officers of the Company have been granted rights whereby their options
will vest automatically upon a change of control of the Company (as defined in
the 1997 Stock Option Plan).
The 1997 Stock Option Plan may be amended from time to time by the Board of
Directors of Nextel International; provided, however, to the extent required for
compliance with any applicable law or regulation, shareholder approval will be
required for any amendment that will (i) increase the aggregate number of shares
of the Company's Common Stock as to which options may be granted under the plan;
(ii) modify the class of persons eligible to receive options; or (iii) otherwise
require shareholder approval under any applicable law or regulations.
COMPENSATION OF DIRECTORS
Currently, the Company's directors do not receive any compensation or
reimbursements for out-of-pocket expenses for their service on the Company's
board of directors.
65
<PAGE> 66
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1997, a wholly owned subsidiary of Nextel Communications
was the sole holder of record of the Company's Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TAX SHARING AGREEMENT
The Tax Sharing Agreement effective as of January 1, 1997, between Nextel
Communications and the Company (the "Tax Sharing Agreement") provides that the
Company must pay Nextel Communications its federal income tax liability computed
as if the Company had filed a separate federal income tax return. Such
computation would take into account any carryovers and carrybacks of losses and
credits that would be allowed if the Company had filed a separate federal income
tax return except that, in making such computation for any taxable year, such
liability will be determined at the highest corporate tax rate, and without an
exemption for purposes of calculating the alternative minimum tax and the
environmental tax. The Tax Sharing Agreement further provides that the Company
may be included in any consolidated, combined, or unitary state or local income
or franchise tax return or report, and the Company's liability with respect to
such taxes will be computed in a manner similar to and consistent with the
calculation of the Company's federal income tax liability.
Furthermore, the Tax Sharing Agreement provides that Nextel Communications
is entitled to utilize on behalf of the consolidated group all of the tax
attributes and other items of income, gain, loss, deduction, expense, credit and
similar treatments of the Company arising in the current taxable year or another
taxable year or years and which properly may be carried back or carried forward
to such taxable year. The Company is not entitled to receive any compensation by
reason of Nextel Communications' utilization of such attributes or items on
behalf of the group in determining for any taxable year or years the
consolidated taxable income and consolidated tax liability for such taxable year
or years.
Nextel Communications will not be required to compensate the Company for
the benefit of loss or credit carryback from the Company's separate filing to
the consolidated group should the Company leave the Nextel Communications
consolidated group.
Under the U.S. consolidated income tax rules, the Company and each other
member of the U.S. consolidated tax group of which it is a member will be
jointly and severally liable for the U.S. tax liabilities of each other member
of such group.
OVERHEAD SERVICES AGREEMENT
Pursuant to an Overhead Services Agreement between the Company and Nextel
Communications (the "Services Agreement"), Nextel Communications has agreed to
provide to the Company certain services, including those relating to accounts
payable, cash management, payroll, human resources, finance reporting and audit
and legal, engineering and technical and marketing and sales assistance. The fee
for services provided pursuant to the Services Agreement is the actual cost
incurred by Nextel Communications, which is billed monthly and payable in 45
days. Pursuant to the Services Agreement, Nextel Communications has agreed to
apportion the aggregate cost incurred by it to provide such services to the
Company and Nextel Communications' other subsidiaries on the basis that Nextel
Communications determines in good faith, from time to time, represents the
relative portion of such services provided by Nextel Communications and used by
each such subsidiary, including the Company, for the relevant period. The
Company has the right to review Nextel Communications' determination and to
discuss with Nextel Communications adjustments that the Company considers
appropriate in light of the services provided to the Company. Nextel
Communications' good faith determination after such consultation is final and
binding. The Services Agreement has a ten-year term, which commenced on March 3,
1997, and, with the consent of Nextel Communications, the Company may elect to
discontinue a particular service or services provided by Nextel Communications
and/or obtain any service from an independent third party.
66
<PAGE> 67
Pursuant to the Services Agreement the Company has agreed that the legal
counsel employed by Nextel Communications as part-time or full-time employees
will provide legal services to Nextel Communications as well as to other
subsidiaries of Nextel Communications and potentially to other entities in which
Nextel Communications holds an ownership interest. The Company has agreed that
such legal counsel may represent the Company as well as Nextel Communications or
any such other subsidiary or any other entity.
NON-COMPETE AGREEMENT
The Company and Nextel Communications entered into the Non-Compete
Agreement pursuant to which Nextel Communications has agreed that neither Nextel
Communications nor any Affiliate (as defined in the agreement) controlled by
Nextel Communications will in the future participate in the ownership or
operation of two-way terrestrial-based mobile wireless communications systems
anywhere other than in the United States and Canada (for so long as Nextel
Communications owns an equity interest in Clearnet) unless such opportunities
have first been presented to the Company. Such restriction does not apply to,
among other things, any commercial relationship with any Wireless Entity
(including channel or frequency sharing, roaming, purchase or sale of goods or
services, licensing of intellectual property or other intangible rights or
similar business related arrangement) that does not involve the directing or
participating in the management of such Wireless Entity. The Company has agreed
that, without the consent of Nextel Communications, neither it, its Restricted
Affiliates nor any of its Unrestricted Affiliates (each as defined in the
indentures for the March 1997 Notes and the March 1998 Notes) will participate
in the ownership or management of any wireless communications service business
in the United States or Canada other than with respect to its interest in
Clearnet. Such restrictions terminate upon the earliest to occur of (i) April
15, 2007 and (ii) the date on which a Change of Control (as defined in the
indentures for the March 1997 Notes and the March 1998 Notes) occurs.
If Nextel Communications gives the Company an Initial Notice of a Future
Wireless Opportunity, the Company will have 60 days to notify Nextel
Communications that it intends to pursue such opportunity, and how it intends to
finance its participation. The Company must have secured a financing commitment
within 90 days of the date of the Initial Notice and the Future Wireless
Opportunity must be consummated within nine months of the date of the Initial
Notice. In the event the Company fails to respond to Nextel Communications
within the 60 and 90 day time frames or fails to consummate the transaction
within the nine-month period, Nextel Communications will be free to pursue the
Future Wireless Opportunity.
Nextel Communications and the Company have agreed not to amend the
Non-Compete Agreement if such amendment is material and adverse to the holders
of the March 1997 Notes and to provide such holders with written notice 30 days
prior to any amendment. The Company and Nextel Communications have entered into
an amendment to the Non-Compete Agreement to extend its benefits to the holders
of the March 1998 Notes, which will become effective April 11, 1998.
MOTOROLA RELATIONSHIPS
Motorola, a significant shareholder of Nextel Communications, provides
equipment and vendor financing to the Operating Companies. For a description of
the Motorola Financings, see Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Nextel Communications and the Company have entered into an agreement
relating to the Motorola Financing pursuant to which Nextel Communications has
agreed to make at least $95 million of the $650 million of vendor financing
available to the Company. Nextel Communications is not obligated to make any
additional amounts available to the Company under the Motorola Financing.
However, based on discussions with Nextel Communications the Company believes
that Nextel Communications' utilization of Motorola vendor financing available
to it and its relevant subsidiaries will not prevent the Company from obtaining
sufficient funding under the Motorola Financing to meet its business plan.
Motorola, through Motorola International, is also a shareholder in Nextel
Brazil and Nextel Peru. Additionally, Motorola, through its affiliates, is the
majority shareholder in J-Com. See Part I, Item 1, "Business -- The Company's
Operations and Investments -- Partner Description" for Brazil and Peru and
"-- Post Fiscal Year-End Transactions and Developments."
67
<PAGE> 68
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following Financial Statements are included in Part II Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1997...................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997....................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997........... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997....................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
(2) Financial Statement Schedules are submitted herewith and are
included herein in 14(d):
<TABLE>
<S> <C>
Schedule I........................................ F-24
Schedule II....................................... F-28
</TABLE>
------------------------
(3) List of Exhibits -- Refer to Exhibit Index, which is incorporated
herein by reference.
(b) Reports on Form 8-K:
None.
(c) Exhibits listed above in Item 14(a)(3) are included herein.
(d) Financial Statement Schedules listed above in Item 14(a)(2) are
included herein.
68
<PAGE> 69
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1997......................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended
December 31, 1995, 1996 and 1997.......................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 70
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Nextel International, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheets of Nextel
International, Inc. and subsidiaries (the Company) as of December 31, 1996 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedules listed in
the Index at Item 14. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1996 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Seattle, Washington
February 19, 1998
F-2
<PAGE> 71
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (of which $68,992 is
restricted as of December 31, 1997)................... $ 53,029 $ 159,790
Marketable securities.................................. -- 128,560
Accounts receivable, less allowance for doubtful
accounts of $0 and $1,003............................. 540 3,838
Radios and accessories................................. 830 1,749
Prepaid and other...................................... 183 15,884
Notes receivable....................................... 5,704 --
-------- ----------
Total current assets.............................. 60,286 309,821
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $74 and $1,992............................ 8,703 136,210
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES, at cost less
equity in net losses of $5,991 and $7,526................. 98,982 106,489
INTANGIBLE ASSETS, net of accumulated amortization of $0 and
$14,664................................................... 10,878 526,000
INVESTMENTS AND OTHER ASSETS................................ 20,518 44,518
-------- ----------
$199,367 $1,123,038
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 1,306 $ 24,456
Accrued expenses and other............................. 4,513 51,592
Due to parent.......................................... 152,783 8,254
Current portion of long-term debt...................... -- 2,211
-------- ----------
Total current liabilities......................... 158,602 86,513
LONG-TERM DEBT.............................................. -- 597,809
DEFERRED INCOME TAXES....................................... 1,562 120,777
-------- ----------
Total liabilities...................................... 160,164 805,099
MINORITY INTEREST........................................... -- 21,910
COMMITMENTS AND CONTINGENCIES (NOTES 2, 8 AND 11)
STOCKHOLDERS' EQUITY:
Common stock (73,000,000 shares authorized, no par
value, 36,500,000 shares issued and outstanding)...... 65,043 395,428
Accumulated deficit.................................... (28,741) (102,689)
Unrealized gain on investments, net of tax............. 2,901 3,290
-------- ----------
Total stockholders' equity........................ 39,203 296,029
-------- ----------
$199,367 $1,123,038
======== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 72
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Radio service revenue............................ $ -- $ -- $ 10,589
Equipment sales and maintenance.................. -- -- 2,426
---------- ---------- ----------
-- -- 13,015
---------- ---------- ----------
OPERATING EXPENSES
Cost of radio service revenue.................... -- -- 6,189
Cost of equipment sales and maintenance.......... -- -- 1,235
Selling, general and administrative.............. 277 9,318 26,768
Depreciation and amortization.................... 19 168 18,381
---------- ---------- ----------
296 9,486 52,573
---------- ---------- ----------
OPERATING LOSS........................................ (296) (9,486) (39,558)
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income.................................. 6,233 4,300 19,666
Interest expense................................. -- (323) (56,583)
Loss from equity method investments.............. (6,853) (5,991) (11,401)
Other, net....................................... (15,002) 379 5,561
Minority interest................................ -- -- 2,085
---------- ---------- ----------
(15,622) (1,635) (40,672)
---------- ---------- ----------
LOSS BEFORE INCOME TAX BENEFIT (PROVISION)............ (15,918) (11,121) (80,230)
INCOME TAX BENEFIT (PROVISION)........................ (2,119) (1,355) 6,282
---------- ---------- ----------
NET LOSS.............................................. $ (18,037) $ (12,476) $ (73,948)
---------- ---------- ----------
NET LOSS PER COMMON SHARE, BASIC AND DILUTED.......... $ (0.49) $ (0.34) $ (2.03)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING......................................... 36,500,000 36,500,000 36,500,000
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 73
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS UNREALIZED
--------------------- (ACCUMULATED GAIN (LOSS)
SHARES AMOUNT DEFICIT) ON INVESTMENTS TOTAL
---------- -------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995............ -- $ -- $ 1,772 $ -- $ 1,772
Common stock issued............ 36,500,000 -- -- -- --
Capital contributions from
parent....................... -- 20,181 -- -- 20,181
Net loss....................... -- -- (18,037) -- (18,037)
Unrealized gain on investments,
net of tax................... -- -- -- 8,023 8,023
---------- -------- --------- ------- --------
BALANCE, December 31, 1995.......... 36,500,000 20,181 (16,265) 8,023 11,939
Capital contributions from
parent....................... -- 44,862 -- -- 44,862
Net loss....................... -- -- (12,476) -- (12,476)
Unrealized loss on investments,
net of tax................... -- -- -- (5,122) (5,122)
---------- -------- --------- ------- --------
BALANCE, December 31, 1996.......... 36,500,000 65,043 (28,741) 2,901 39,203
Capital contributions from
parent....................... -- 315,585 -- -- 315,585
Issuance of warrants in
connection with private
placement.................... -- 14,800 -- -- 14,800
Net loss....................... -- -- (73,948) -- (73,948)
Unrealized gain on investments,
net of tax................... -- -- -- 389 389
---------- -------- --------- ------- --------
BALANCE, December 31, 1997.......... 36,500,000 $395,428 $(102,689) $ 3,290 $296,029
========== ======== ========= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 74
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(18,037) $(12,476) $(73,948)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 19 168 18,381
Interest accretion on long-term debt, net of
capitalization................................ -- -- 53,681
Loss from equity method investments............. 6,853 5,991 11,401
Deferred income taxes........................... -- -- (14,292)
Minority interest............................... -- -- (2,085)
Investment impairment........................... 15,000 -- --
Change in current assets and liabilities:
Accounts receivable........................ -- (540) 1,374
Radios and accessories..................... -- (830) 586
Prepaid and other.......................... (11) (172) (13,167)
Accounts payable, accrued expenses and
other.................................... 2,239 7,052 8,052
Other...................................... -- (2,176) (6,447)
-------- -------- --------
Net cash provided by (used in) operating
activities.................................... 6,063 (2,983) (16,464)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (36) (8,818) (101,892)
Purchase of marketable securities............... -- -- (227,957)
Proceeds from sale of marketable securities..... -- -- 100,729
Purchase of licenses............................ (10,135) (743) --
Issuance of notes receivable.................... -- (5,703) --
Acquisition of additional equity interests in
consolidated subsidiaries..................... -- -- (35,131)
Investments in unconsolidated subsidiaries...... (36,962) (57,022) (120,976)
Other........................................... (762) -- (3,926)
-------- -------- --------
Net cash used in investing activities........... (47,895) (72,286) (389,153)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments to parent, net....................... (18,589) (1,866) (23,556)
Capital contributions from parent............... 20,181 44,862 6,366
Capital contributions from minority
stockholders.................................. -- -- 1,387
Proceeds from issuance of warrants.............. -- -- 14,800
Net proceeds from issuance of long-term debt.... -- -- 517,828
Repayment of long-term debt..................... -- -- (4,447)
-------- -------- --------
Net cash provided by financing activities....... 1,592 42,996 512,378
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (40,240) (32,273) 106,761
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 125,542 85,302 53,029
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............. $ 85,302 $ 53,029 $159,790
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.......... $ -- $ -- $ 1,993
======== ======== ========
Cash paid during the year for income taxes...... $ -- $ -- $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 75
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BUSINESS ORGANIZATION: Nextel International, Inc.
(the "Company") is an indirect, wholly owned subsidiary of Nextel
Communications, Inc. (Nextel Communications, Inc. and its wholly owned
subsidiaries are referred to herein as "Nextel Communications"). The Company
currently provides wireless communications services in five of the largest
cities in Latin America and two of the largest cities in Asia, primarily
utilizing specialized mobile radio ("SMR") channels in its licensed service
areas. The Company is the largest SMR service provider in Brazil and Mexico, and
holds the largest SMR channel position in Argentina.
The Company's strategy is focused on using its leading analog dispatch or
SMR channel positions in its principal markets, together with Nextel
Communications' experience and supplier relationships, to upgrade its services
from analog dispatch to digital enhanced specialized mobile radio ("ESMR")
services. The Company's upgrade to digital networks will allow it to increase
capacity significantly and offer in a single digital subscriber unit, additional
services and advanced features such as direct connect (group calling and instant
conferencing), telephone interconnect and text messaging services. The Company
is upgrading its analog SMR networks to digital ESMR networks using the
integrated Digital Enhanced Network ("iDEN") technology developed by Motorola,
Inc. ("Motorola") and deployed by Nextel Communications in certain of its
markets. The Company also continues to assess opportunities to enter into new
markets, particularly in Latin America and Asia.
PRINCIPLES OF CONSOLIDATION: As of December 31, 1997, the Company directly
or indirectly owned 100% of Comunicaciones Nextel de Mexico S.A. de C.V.
("Nextel Mexico") (formerly Corporacion Mobilcom S.A. de C.V.); 50% of McCaw
Argentina S.R.L. ("Nextel Argentina") (formerly McCaw Argentina S.A.), accounted
for using the equity method; 30% of Infocom Communications Network, Inc.
("Nextel Philippines"), a Philippine company, accounted for using the equity
method; 3.7% of Clearnet Communications, Inc. ("Clearnet"), accounted for as an
investment available-for-sale and reflected at fair market value; and a
contractual right to receive 12.1% of the profits of the Shanghai GSM System
(See Note 2), accounted for as a cost method investment. Additionally, the
Company through an 81% equity interest in McCaw International (Brazil), Ltd.
("Nextel Brazil") (formerly Wireless Ventures of Brazil ("WVB")) and Nextel
Brazil's 95% equity interest in Nextel S.A. (formerly Airlink S.A.), held a 77%
equity interest in Nextel S.A., a Brazilian company. Accordingly, the Company's
consolidated financial statements include the accounts of Nextel Brazil and
Nextel Mexico commencing January 30, 1997 and September 1, 1997, respectively,
which are the dates when the Company acquired a controlling interest in the
companies (See Note 2). Prior to September 1, 1997, Nextel Mexico was accounted
for using the equity method. The Company's consolidated financial statements
also include the accounts of Nextel Argentina prior to May 6, 1997, at which
time it was contributed to Nextel International (Argentina), Ltd., (the
"Argentina Joint Venture") a joint venture in which the Company owns 50% (See
Note 2). Subsequent to May 6, 1997, the Argentina Joint Venture is accounted for
using the equity method.
The accounts of the Company's consolidated foreign subsidiaries and foreign
subsidiaries accounted for under the equity method are presented utilizing
accounts as of a date one month earlier than the accounts of the Company and its
U.S. subsidiaries to ensure timely reporting of consolidated results.
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany transactions
and balances have been eliminated.
F-7
<PAGE> 76
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
CONCENTRATIONS OF RISK: For the year ended December 31, 1997, $3,348 and
$9,605 of the Company's revenues were generated in Mexico and Brazil,
respectively. As of December 31, 1997, $288,695 and $420,242 of the Company's
assets were located in Mexico and Brazil, respectively (See Note 15).
Additionally, the Company's assets include $106,489 related to its investments
in unconsolidated subsidiaries located in Argentina, China and the Philippines
(See Note 4).
The Company is party to certain equipment purchase agreements with Motorola
(See Notes 11 and 14). For the foreseeable future the Company expects that it
will need to rely on Motorola for the manufacture of a substantial portion of
the equipment necessary to construct its digital ESMR networks.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company is subject to the laws and regulations governing
telecommunication services in effect in each of the countries in which it
operates. These laws and regulations can have a significant influence on the
Company's results of operations and are subject to change by the responsible
governmental agencies. The financial statements as presented reflect certain
assumptions based on laws and regulations currently in effect in each of the
various countries. The Company cannot predict what future laws and regulations
might be passed that could have a material effect on the Company's results of
operations. The Company assesses the impact of significant changes in laws and
regulations on a regular basis and updates the assumptions used to prepare its
financial statements accordingly.
CASH AND EQUIVALENTS: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES: Marketable securities, consisting primarily of
short-term investments in certificates of deposit and commercial paper, are
classified as "available for sale" and are recorded at fair value based on
quoted market prices.
RADIOS AND ACCESSORIES: Radios and accessories are held for sale to
customers. Radios and accessories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is provided using the straight line method over estimated
useful lives as follows:
<TABLE>
<S> <C>
Equipment................................................... 3-10 years
Computer equipment and software............................. 3-5 years
Furniture and fixtures...................................... 3 years
Leasehold improvements...................................... Life of lease
</TABLE>
Construction in progress includes labor, material, transmission and related
equipment, engineering, site development, capitalized interest, and other costs
relating to the construction and development of wireless networks. The Company
will begin depreciating the cost of the wireless networks over a ten year period
upon commencement of commercial operations in each market.
Expenditures which increase value or extend useful lives are capitalized,
while maintenance and repairs are charged to operations as incurred.
INTANGIBLE ASSETS: Intangible assets consist of SMR licenses, goodwill and
trademarks which are recorded at cost. SMR licenses in the countries in which
the Company operates are issued conditionally for various periods of time. The
SMR licenses are generally renewable providing the licensee has complied with
applicable rules and policies. In most instances, the Company believes it has
complied and intends to comply
F-8
<PAGE> 77
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
with these standards and is amortizing the related costs using the straight line
method over their estimated useful life of 20 years. In some cases, the Company
currently is not in compliance with applicable requirements and, where
appropriate, has filed requests for extensions with the appropriate government
agency. The Company expects that such extension requests will be granted and the
risk of having these or any other licenses revoked is remote. The Company begins
amortizing the cost of SMR licenses upon commencement of commercial operations
in each market. The excess of the purchase price paid over the fair value of net
assets acquired is recorded as goodwill and amortized using the straight-line
method over its estimated useful life of 20 years. Trademarks are amortized over
their respective useful lives.
INVESTMENTS: The Company's investment in Clearnet is included in
investments and other assets and classified as available-for-sale as of the
balance sheet date. Accordingly, it is reported at fair value, with unrealized
gains and losses, net of tax, recorded in stockholders' equity.
Investments where the Company has the ability to exercise significant
influence over operating and financial policies and possesses a voting interest
of 50% or less are accounted for using the equity method. The excess of the cost
of the Company's investments over the net assets acquired is being amortized
over 20 years. Amortization of this excess of $2,361, $3,677 and $3,137 for the
years ended December 31, 1995, 1996 and 1997, respectively, is reflected in the
accompanying consolidated statements of operations in loss from equity method
investments.
LONG-LIVED ASSETS: Long-lived assets and identifiable intangibles to be
held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Impairment is measured by comparing the carrying value of the long-lived asset
to the estimated undiscounted future cash flows expected to result from use of
the assets and their eventual disposition. The Company determined that as of
December 31, 1997, there had been no impairment in the carrying value of
long-lived assets.
REVENUE RECOGNITION: Radio service revenues are recorded when earned.
Equipment sales and maintenance revenues are recorded when the related goods and
services are delivered. Monthly access charges are billed in advance and
recognized as revenue when the services are provided. Rental fee revenue and
monthly fixed access charges are recognized in the period service was provided.
FOREIGN EXCHANGE: Results of the Company's international operations are
translated from the designated functional currency to the U.S. dollar using
average exchange rates during the period, while assets and liabilities are
translated from the designated functional currency to the U.S. dollar using
end-of-period rates. The resulting translation gains or losses, if any, are
accumulated in the "cumulative translation adjustment" account, a component of
stockholders' equity. No translation gains or losses were recorded during the
three year period ended December 31, 1997.
All gains or losses resulting from foreign currency transactions are
included in other income or expense in the Company's consolidated statements of
operations. During the year ended December 31, 1997, the Company recognized
$6,000 of foreign currency transaction gains. There were no foreign currency
transactions gains or losses for the years ended December 31, 1995 and 1996.
During 1997, Nextel Mexico and Nextel Brazil were considered to be
operating in "highly inflationary" economies, as defined in Statement of
Financial Accounting Standards No. 52, Foreign Currency Translation.
Accordingly, Nextel Mexico and Nextel Brazil used the U.S. dollar as their
functional currency. Effective January 1, 1998, Nextel Brazil will no longer be
considered to be operating in a "highly inflationary" economy and will begin
using the Brazilian real as its functional currency. Nextel Mexico will continue
to use the U.S. dollar as its functional currency in 1998.
INCOME TAXES: The Company accounts for U.S. federal income taxes under the
asset and liability method. Under this method, deferred income taxes are
recorded for the temporary differences between the
F-9
<PAGE> 78
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
financial reporting basis and tax basis of the Company's assets and liabilities.
These deferred taxes are measured by the provisions of currently enacted tax
laws. The Company is included in the consolidated tax return of Nextel
Communications; however, the income tax accounts of Nextel International are
stated as if the Company filed a separate return, which is consistent with the
tax sharing agreement between the Company and Nextel Communications.
Each of the Company's Brazilian and Mexican subsidiaries file a separate
tax return.
NET LOSS PER SHARE: Net loss per share is computed based on the weighted
average number of common shares outstanding during the period.
NEW ACCOUNTING STANDARDS: During 1997, the Company adopted Statements of
Financial Accounting Standards No. 128, Earnings per Share, and No. 129,
Disclosure of Information about Capital Structure. The adoption of these
standards did not have a significant effect on the Company's current or prior
year financial statements or disclosures.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform with the current presentation.
2. BUSINESS COMBINATIONS AND INVESTMENTS
NEXTEL SERVICES AND NEXTEL CANMEX: On January 1, 1997, Nextel Services, a
wholly owned subsidiary of Nextel Communications, was merged into the Company.
Nextel Services includes all amounts associated with the Company's expatriate
employees. Subsequent to the merger, all intercompany liabilities were converted
to contributed capital.
On March 3, 1997, Nextel Canmex, a wholly owned subsidiary of Nextel
Communications, was merged into the Company. Nextel Canmex is primarily an
investment and asset holding company.
Immediately prior to the merger, all of Nextel Canmex's assets were
transferred to Nextel Communications with the exception of an investment in 38%
of the outstanding common stock of Nextel Mexico and related assets and 3.7% of
the outstanding common stock of Clearnet. The remaining intercompany liability
was converted to contributed capital subsequent to the merger.
As the mergers described above represent transfers of companies under
common control, they have been accounted for in a manner similar to poolings of
interests. The pooling-of-interests method of accounting is intended to present
as a single interest two or more common shareholders' interests which were
previously independent; accordingly, the historical financial statements for the
periods presented prior to the mergers are restated as though the companies had
been combined.
NEXTEL ARGENTINA: On August 6, 1996, Nextel Communications contributed its
investment in Nextel Argentina to the Company. Nextel Argentina has licenses to
provide SMR services in the Argentine cities of Buenos Aires, Cordoba, Rosario,
and Mendoza.
As the contribution of Nextel Argentina to the Company represented a
transfer of companies under common control, it was accounted for in a manner
similar to a pooling of interests. Accordingly, the historical financial
statements of the Company for the periods presented prior to the contribution
were restated as though Nextel Argentina had been combined.
On May 6, 1997, the Company contributed its 100% ownership interest in
Nextel Argentina into Nextel International (Argentina), Ltd. (the "Argentina
Joint Venture"), a joint venture between the Company and Wireless Ventures of
Argentina, L.L.C. ("WVA"). WVA's contribution included all of the outstanding
common stock of a paging company and two companies that own SMR licenses in
Argentina (collectively the "WVA Entities"). During 1997, Nextel Argentina and
the WVA Entities were merged, with Nextel Argentina being the surviving entity
(the merged entities are herein collectively referred to as "Nextel
F-10
<PAGE> 79
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS AND INVESTMENTS -- (CONTINUED)
Argentina" subsequent to the formation of the Argentina Joint Venture). The
Company has a 50% voting interest and shares equally in the profits and losses
of the Argentina Joint Venture. Capital contributions are made equally unless
otherwise agreed to by both the Company and WVA. Commencing on May 6, 1997, the
Company accounted for its investment in the Argentina Joint Venture under the
equity method of accounting.
On January 30, 1998, the Company acquired the remaining 50% interest in the
Argentina Joint Venture from WVA for a purchase price of $46 million in cash. As
a result of the purchase, the Company increased its effective ownership interest
in Nextel Argentina from 50% to 100%, and will consolidate the accounts of
Nextel Argentina commencing February 1, 1998 under the purchase method of
accounting. The carrying value of the Company's investment in Nextel Argentina
as of January 30, 1998 approximates $63.0 million and will be allocated to the
net assets acquired based on their estimated fair values, including licenses and
goodwill, which will be amortized over their estimated useful lives of 20 years.
NEXTEL PHILIPPINES: On June 14, 1996, the Company acquired a 30% interest
in Nextel Philippines, a Philippine wireless telecommunications company, for $16
million in cash. Nextel Philippines provides paging services to subscribers in
the Philippines through a nationwide license granted by the Philippine
government. In addition, Nextel Philippines has a nationwide license to provide
digital ESMR services. The Company's investment in Nextel Philippines is
accounted for using the equity method. The excess purchase price over the net
assets acquired totaled $16.2 million and is being amortized over 20 years.
The Company has reached an agreement in principle with three groups of
local shareholders of Nextel Philippines (the "Philippines Shareholders") and is
in the process of finalizing definitive documentation (the "Philippine Partner
Agreement") that would: (i) restructure the existing corporate governance
arrangements to give the Company increased minority shareholder rights; (ii)
provide for the purchase by the Company of existing shareholder loans of the
Philippines Shareholders totaling approximately $19.6 million ($2.0 million of
which the Company had purchased as of February 19, 1998) which loans, upon
purchase by the Company, bear interest at 18% per annum and will be convertible
into equity of Nextel Philippines; (iii) provide for the funding by the Company
of Nextel Philippines' future capital needs pursuant to loans which could, at
the option of the Company, be converted into equity of Nextel Philippines; (iv)
provide one Philippine Shareholder group with the right to put its 20% interest
in Nextel Philippines to the Company for approximately $9.4 million, beginning
on the date which is nine months after closing of the Philippines Partner
Agreement; and (v) provide the Company with the right to purchase such
shareholder's interest in Nextel Philippines for approximately $11.6 million if
the Philippine Shareholder's put right is not exercised. The ability of the
Company to convert shareholder loans into equity or to satisfy the Nextel
Philippines shareholder put or call rights are subject to applicable Philippine
foreign ownership rules. The Company expects to continue to account for its
investment in Nextel Philippines using the equity method subsequent to
consummating the Philippine Partner Agreement.
SHANGHAI CCT MCCAW: As of December 31, 1997, the Company maintained a 30%
ownership interest in Shanghai CCT-McCaw Telecommunications Systems Co., Ltd.
("Shanghai CCT McCaw"), a Chinese equity joint venture. Shanghai CCT McCaw
currently participates in a Global System for Mobile communications network in
Shanghai, China (the "Shanghai GSM System") through a profit sharing arrangement
(the "Unicom Agreement") with China United Communications, Ltd., the owner of
the Shanghai GSM system. Foreign entities or individuals are not permitted to
directly own or operate telecommunications systems in China under current law.
The Company does not have the right to influence the operations of the Shanghai
GSM System and therefore accounts for its investment in Shanghai CCT McCaw under
the cost method.
Under the Unicom Agreement as amended, Shanghai CCT McCaw has the right to
receive 40.2% of the profits, as defined, of the Shanghai GSM System. The
Company, through its 30% interest in Shanghai CCT McCaw and Shanghai CCT McCaw's
right to receive 40.2% of the profits of the Shanghai GSM System, has
F-11
<PAGE> 80
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS AND INVESTMENTS -- (CONTINUED)
the right to receive approximately 12.1% of the profits of the Shanghai GSM
System. Cash payments are made to the Company from Shanghai CCT McCaw in the
form of distributions, which are made at the discretion of Shanghai CCT McCaw's
board of directors. Through December 31, 1997, the Company has received
distributions totaling $1,218 which have been remitted to Shanghai CCT McCaw in
the form of a loan (See Note 11).
NEXTEL MEXICO: Through a series of investments from March 1995 to December
1996, Nextel Canmex acquired approximately 30.1% of the outstanding shares of
Nextel Mexico, a Mexican company with licenses to provide SMR services in
various cities in Mexico, including Mexico City, Guadalajara, Monterey, and
Tijuana. Upon acquiring a 30.1% ownership interest in Nextel Mexico, the Company
commenced accounting for Nextel Mexico using the equity method of accounting.
In January 1997, Nextel Communications purchased additional common shares
of Nextel Mexico at a cost of $16.6 million, in exchange for shares of Nextel
Communications Common Stock. Such interest was simultaneously contributed to the
Company. In February 1997, Nextel Mexico shareholders approved a $27.0 million
capital call (the "Nextel Mexico Capital Call"), and the Company funded its pro
rata share (approximately $10.3 million) with a cash contribution. On April 16,
1997, the Company purchased additional shares of Nextel Mexico by funding the
unsubscribed portion of the Nextel Mexico Capital Call (approximately $11.1
million), thereby increasing the Company's ownership interest to approximately
46.3%.
Through a series of transactions from June 30, 1997 to December 12, 1997,
the Company acquired substantially all of the remaining shares of Nextel Mexico
at an aggregate cost of $104.5 million, thereby increasing the Company's equity
interest in Nextel Mexico to approximately 100%. Approximately $22.1 million of
the purchase price was paid in January 1998 and is included in accrued expenses
and other as of December 31, 1997.
Upon obtaining greater than 50% of the outstanding common stock and
obtaining control of Nextel Mexico, on September 1, 1997 the Company commenced
consolidating the accounts of Nextel Mexico under the purchase method of
accounting. The total purchase price of the Company's investment in Nextel
Mexico was approximately $199.7 million and was allocated to the net assets
acquired based on their estimated fair values, including licenses and goodwill,
which are being amortized over their estimated useful lives of 20 years.
During the year ended December 31, 1995, the Company recorded a $15.0
million charge to operations representing an other than temporary decline in the
fair value of this investment as a result of the decline in the Mexican peso.
CLEARNET: The Company owns 1,596,067 shares of common stock representing
3.7% of Clearnet. Clearnet provides analog SMR and ESMR services in Canada and
holds a nationwide license to provide PCS services in Canada. The Company's
investment in Clearnet is accounted for at fair market value. The market value
of Clearnet common stock at December 31, 1997 was $11 3/8 per share.
As a condition of the high-yield offering (See Note 17), Nextel
Communications agreed to transfer securities representing 6,777,778 shares of
common stock of Clearnet (or an approximately 15.7% equity interest in Clearnet)
to the Company in exchange for Series A Redeemable Exchangeable Preferred Stock
of the Company with a value to be determined at the date of the exchange based
on the current fair value of the contributed Clearnet shares, net of tax.
NEXTEL BRAZIL: On January 30, 1997, Nextel Communications purchased 81% of
the issued and outstanding capital stock of Nextel Brazil from Telcom Ventures,
Inc. and affiliates (collectively "Telcom Ventures") in exchange for $186.3
million in Nextel Communications Class A Common Stock ("Nextel Common Stock").
Nextel Communications' investment in Nextel Brazil was simultaneously
contributed to the Company. Nextel Brazil and its subsidiaries hold or have
options to acquire licenses to provide SMR services in 23 cities in Brazil
including Sao Paulo, Rio de Janeiro, Belo Horizonte, Curitiba, and Brasilia.
F-12
<PAGE> 81
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS AND INVESTMENTS -- (CONTINUED)
Telcom Ventures has the right between October 31, 2001 and November 1, 2003, to
require the Company to redeem their 19% interest in Nextel Brazil at fair market
value as determined pursuant to an appraisal procedure. The Company is currently
required to fund 100% of Nextel Brazil's capital requirements until April 30,
1999 when Telcom Ventures must either: (i) contribute its pro rata share plus
accrued interest or (ii) dilute its ownership interest. Dividends may be
declared at the discretion of Nextel Brazil's board of directors and are
allocated based on the ownership percentages in effect at the date of
declaration. No dividends have been declared to date.
The total cost of the acquisition, which was accounted for as a purchase,
was $187.2 million and was allocated to the net assets acquired based on their
estimated fair values, including licenses and goodwill, which are being
amortized over their estimated useful lives of 20 years.
MCS: On September 26, 1997, Nextel S.A. acquired 49% of the capital stock
of MCS Radio Telefonia, Ltda. ("MCS"), an indirect wholly owned subsidiary of
Motorola, an option to purchase the remaining 51% of the capital stock of MCS
upon receipt of the approval of the applicable Brazilian regulatory authorities,
and certain assets of MCS. Upon the approval from Brazilian regulatory
authorities, the option for the remaining 51% will be exercisable for
approximately $3.2 million. In connection with the transaction, Motorola,
through a wholly owned subsidiary, acquired 5% of the outstanding capital stock
of Nextel S.A. MCS owns SMR licenses in 13 of the largest Brazilian cities,
including Sao Paulo, Rio de Janeiro and Belo Horizonte. Immediately subsequent
to the acquisition, the Company, through its 81% equity interest in Nextel
Brazil and Nextel Brazil's 95% equity interest in Nextel S.A. held a 77% equity
interest in Nextel S.A.
The total cost of the acquisition, which was accounted for as a purchase,
was $19.3 million and was allocated to the net assets acquired based on their
estimated fair values, including licenses and goodwill, which are being
amortized over their estimated useful lives of 20 years.
INDONESIA: On August 15, 1997, the Company entered into a preliminary
agreement with PT Gunung Sewu Kencana ("GSK"), a large diversified Indonesian
company, which gives the Company the right, upon receipt of required regulatory
approval, to purchase a 37.5% interest in PT Mitra Kencana Telekomunindo
("MKT"), an Indonesian corporation owned by GSK. MKT holds a provisional license
for 80 SMR channels in Indonesia that can be converted into an operating license
upon satisfaction of certain regulatory approvals. Although the Company believes
that MKT presents it with significant opportunities to expand its SMR network in
Asia, the Company does not intend to make any substantial investment in MKT
until the economic and political conditions in Indonesia, and the economic
conditions in Asia generally, have stabilized. To date, the Company has advanced
$1.5 million to MKT in the form of a loan that is guaranteed by GSK.
NEXTEL PERU: On January 29, 1998, the Company acquired a 70.1% interest in
Valorcom S.A. ("Nextel Peru"), a Peruvian wireless telecommunications company,
for $27.9 million, of which $7.0 million was paid at the acquisition date. The
remaining balance of $20.9 million is to be paid in the form of capital
contributions over approximately six months. Nextel Peru, holds through its
subsidiaries, licenses to operate 138 SMR channels in the greater Lima area.
Motorola, through an indirect subsidiary, holds a 19.9% interest in Nextel Peru.
The Company's investment in Nextel Peru is expected to be accounted for as a
purchase. Nextel Peru's historical operations are insignificant relative to the
results of the Company.
F-13
<PAGE> 82
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS AND INVESTMENTS -- (CONTINUED)
PRO FORMA INFORMATION: The following summarized pro forma (unaudited)
information is for the years ended December 31, 1996 and 1997 and assumes the
Nextel Argentina, Nextel Mexico, Nextel Brazil and MCS transactions had occurred
on January 1, 1996.
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Revenues................................................... $ 24,697 $ 26,312
=========== ===========
Net loss................................................... $ (55,245) $ (89,717)
=========== ===========
Net loss per share, basic and diluted...................... $ (1.51) $ (2.46)
=========== ===========
Weighted average shares outstanding........................ 36,500,000 36,500,000
=========== ===========
</TABLE>
The above amounts consolidate the historical results of Nextel Argentina,
the WVA Entities, Nextel Mexico, Nextel Brazil and MCS prior to the acquisitions
and reflect adjustments for the recognition of the minority ownership interests
and the amortization of licenses and goodwill. The pro forma information is not
necessarily indicative of the results that would actually have occurred had the
transactions been consummated on the date indicated, nor are they necessarily
indicative of future operating results of the Company.
3. NOTES RECEIVABLE
At December 31, 1996, notes receivable consisted of the following:
<TABLE>
<S> <C>
Due from affiliated companies............................... $5,378
Due from officer of Nextel Communications................... 250
Interest receivable......................................... 76
------
$5,704
======
</TABLE>
All of the balances outstanding as of December 31, 1996 plus accrued
interest were transferred to Nextel Communications prior to the merger of Nextel
Canmex and the Company.
4. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
Balances at December 31, 1996 consist of the Company's 30% interest in
Nextel Philippines and its results of operations from June 14, 1996 (date of
acquisition) to December 31, 1996, 30.1% of Nextel Mexico and its results of
operations for the year ended December 31, 1996 and the Company's investment in
Shanghai CCT McCaw, accounted for under the cost method. At December 31, 1997,
investments in unconsolidated subsidiaries consists of the Company's 30%
interest in Nextel Philippines and its results of operations for the year ended
December 31, 1997, the Company's 50% interest in the Argentina Joint Venture and
its results of operations from May 6, 1997 (date of inception) to December 31,
1997, and the Company's investment in Shanghai CCT McCaw, accounted for under
the cost method.
Summarized financial information for the Company's investments in
unconsolidated subsidiaries accounted for on the equity method as of and for the
year ended December 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Assets...................................................... $57,605 $133,315
Liabilities................................................. 38,453 111,997
Operating loss.............................................. 6,123 12,167
</TABLE>
F-14
<PAGE> 83
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1997
------ --------
<S> <C> <C>
Land........................................................ $ -- $ 85
Leasehold improvements...................................... 16 1,442
Equipment................................................... 245 59,836
Furniture and fixtures...................................... 124 990
Construction in progress.................................... 8,392 75,849
------ --------
8,777 138,202
Less accumulated depreciation and amortization.............. (74) (1,992)
------ --------
$8,703 $136,210
====== ========
</TABLE>
For the year ended December 31, 1997, the Company capitalized $2,511 of
interest related to expenditures for construction of significant additions to
property, plant and equipment. No interest expense was capitalized during the
years ended December 31, 1995 and 1996.
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Licenses.................................................... $10,878 $429,258
Goodwill.................................................... -- 109,894
Trademarks and other........................................ -- 1,512
------- --------
10,878 540,664
Less accumulated amortization............................... -- (14,664)
------- --------
$10,878 $526,000
======= ========
</TABLE>
7. DUE TO PARENT
At December 31, 1996, due to parent represents amounts paid by Nextel
Communications on behalf of the Company since the Company's inception to fund
its operations and investments. In February 1997, the remaining amount due to
parent was converted to capital in connection with the merger of Nextel Canmex
and Nextel Services into the Company. (See Note 2.)
At December 31, 1997, due to parent represents amounts owed to Nextel
Communications as consideration for certain assets transferred to the Company as
well as amounts due under the terms of the tax sharing agreement between the
Company and Nextel Communications. These liabilities are to be extinguished as a
condition of the high-yield offering (See Note 17) through the issuance of
Series A Redeemable Exchangeable Preferred Stock of the Company with a value to
be determined based on the fair value of the extinguished liability.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
1997
--------
<S> <C>
13% Senior discount notes due 2007, net of unamortized
discount of $411,571...................................... $539,892
Nextel Brazil equipment financing, at 2.5% over prime rate
(11% at December 31, 1997)................................ 50,250
Nextel Mexico equipment financing, at rates varying from
9.7% to 14.7%............................................. 9,878
--------
600,020
Less current portion........................................ (2,211)
--------
$597,809
========
</TABLE>
F-15
<PAGE> 84
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT -- (CONTINUED)
SENIOR DISCOUNT NOTES: In March 1997, the Company issued through a private
placement 951,463 units generating approximately $482.0 million in net proceeds.
Each unit is comprised of a 10-year senior discount note (the "Notes") (with a
principal amount due at maturity of $1,000) and one warrant to purchase .38748
shares of Company's common stock (the Warrant) (See Note 12). The Notes have a
13% yield to maturity, are noncallable until April 15, 2002, and require no
interest payments for the first five years. Interest on the Notes is payable in
cash on each April 15 and October 15, commencing October 15, 2002. The Company
is restricted from paying dividends under the terms of the Notes, and the Notes
contain covenants restricting certain transactions.
NEXTEL BRAZIL EQUIPMENT FINANCING: In October, 1997, Nextel Brazil and
Motorola Credit Corp. a subsidiary of Motorola ("Motorola Credit"), entered into
an equipment financing agreement whereby Motorola Credit agreed to provide up to
$125 million in revolving loans (the "Brazil Motorola Financing") to Nextel
Brazil to be used to acquire infrastructure equipment and related services from
Motorola. The Brazil Motorola Financing is repayable in semi-annual installments
over 42 months commencing June 30, 2000 and bears interest at an annual rate
periodically determined by the Company of either the LIBOR rate plus 463 basis
points or the prime rate plus 250 basis points. Currently, the Brazil Motorola
Financing bears an interest rate of prime rate plus 250 basis points (11% at
December 31, 1997). Pursuant to the Brazil Motorola Financing, the revolving
loans are secured by a first priority lien on substantially all of Nextel
Brazil's assets, a pledge of all of the stock of Nextel Brazil and its
subsidiaries, including Nextel S.A., and guarantees by the Company and Motorola
International Development Corporation (which indirectly holds a 5% equity
interest in Nextel S.A.) of 93.9% and 6.1%, respectively, of Nextel Brazil's
obligations under such financing. The Brazil Motorola Financing prohibits the
payment of dividends by Nextel S.A. until the existing loan balance is paid in
full and contains covenants restricting certain transactions and requiring the
maintenance of certain financial ratios. As of December 31, 1997, approximately
$35.5 million of the Company's cash, cash equivalents and marketable securities
have been restricted for use as future equity investments in Nextel Brazil and
its subsidiaries.
NEXTEL MEXICO EQUIPMENT FINANCING: Nextel Mexico holds several secured
financing agreements, with various payment terms and maturities through 2007 and
interest rates ranging from 9.7% to 14.7%. The term loans are secured by a first
priority lien on substantially all of Nextel Mexico's assets. Additionally, the
shares of one of Nextel Mexico's subsidiaries are pledged as collateral for the
loan denominated in Mexican pesos. At December 31, 1997 loans made in Mexican
pesos total approximately $176. All remaining notes are payable in U.S. dollars.
For the years subsequent to December 31, 1997, annual maturities of
long-term obligations are as follows:
<TABLE>
<CAPTION>
PAYABLE IN PAYABLE IN
MEXICAN PESOS U.S. DOLLARS TOTAL
------------- ------------ -----
<S> <C> <C> <C>
1998.................................................... $176 $ 2,035 $ 2,211
1999.................................................... -- 2,105 2,105
2000.................................................... -- 11,823 11,823
2001.................................................... -- 10,989 10,989
2002.................................................... -- 15,593 15,593
Thereafter.............................................. -- 968,870 968,870
---- ---------- ----------
176 1,011,415 1,011,591
Less unamortized discount............................... -- 411,571 411,571
---- ---------- ----------
$176 $ 599,844 $ 600,020
==== ========== ==========
</TABLE>
F-16
<PAGE> 85
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1996 and 1997 are as follows:
CURRENT ASSETS AND CURRENT LIABILITIES: The carrying amounts of these
items are a reasonable estimate of their fair value.
SHANGHAI CCT MCCAW: Included in investments in unconsolidated subsidiaries
is the Company's investment in Shanghai CCT McCaw, accounted for under the cost
method. As there is no active market for this investment, it is impracticable to
estimate its fair value.
INVESTMENTS AND OTHER ASSETS: Included in investments and others assets is
the Company's investment in Clearnet, which approximates its fair value of
$17,607 and $18,155 based on its current stock price of $11 and $11 3/8 per
share as of December 31, 1996 and 1997, respectively.
LONG-TERM DEBT: At December 31, 1997, the fair value of the Notes is
estimated based on quoted market prices and exceeds their carrying value by
$11,957. Fair value of the Company's equipment financing agreements is estimated
based on the Company's current borrowing rates and approximates carrying value
at December 31, 1997 (See Note 8).
INVESTMENT PURCHASE AND SALES OPTIONS: The Company maintains or has
granted certain stock purchase and sale rights in connection with its
investments in Nextel Brazil and Nextel Philippines (See Note 2). The Company
believes that a reasonable estimate of the fair value of these instruments is
not practicable to determine as of December 31, 1997, as there is no active
market for such instruments.
10. INCOME TAXES
The components of income tax benefit (provision) for each of the three
years ended December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................ $(2,119) $(1,355) $(1,745)
Deferred:
Foreign................................................ -- -- 8,027
------- ------- -------
Total income tax benefit (provision)..................... $(2,119) $(1,355) $ 6,282
======= ======= =======
</TABLE>
The reconciliation of income taxes computed at the statutory rate to the
income tax benefit for each of the three years ended December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate........ $(5,412) $(3,781) $(27,095)
Nonconsolidated subsidiary adjustments.................. 7,430 2,209 2,559
Other................................................... 6 330 1,470
Increase in valuation allowance......................... 95 2,597 16,784
------- ------- --------
Tax provision (benefit)................................. $ 2,119 $ 1,355 $ (6,282)
======= ======= ========
</TABLE>
F-17
<PAGE> 86
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES -- (CONTINUED)
Deferred taxes as of December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards................................ $ 2,692 $ 29,088
Deferred interest........................................... -- 17,019
Other....................................................... -- 1,714
------- --------
2,692 47,821
Valuation allowance......................................... (2,692) (40,654)
------- --------
-- 7,167
------- --------
Deferred tax liabilities:
Intangibles................................................. -- 126,172
Unrealized gain on investment............................... 1,562 1,772
------- --------
1,562 127,944
------- --------
Net deferred tax liability.................................. $ 1,562 $120,777
======= ========
</TABLE>
At December 31, 1997, the Company had approximately $67.8 million of net
operating loss carryforwards for Mexican income tax purposes which expire
through 2007. Additionally, the Company had approximately $13.7 million of net
operating loss carryforwards for Brazilian income tax purposes which have no
expiration date and can only be utilized up to the limit of 30% of taxable
income for the year. The Company may be limited in its ability to use tax net
operating losses in any one year depending on its ability to generate sufficient
taxable income.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS: The Company leases various cell sites and
office facilities under operating leases with terms of one to five years. Total
rent expense under operating leases for the years ended December 31, 1995, 1996
and 1997 totaled $50, $161 and $3,325, respectively.
Future minimum lease payments for years ending after December 31, 1997
under operating leases that have initial noncancelable lease terms exceeding one
year are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 7,912
1999........................................................ 8,048
2000........................................................ 7,601
2001........................................................ 6,813
2002........................................................ 5,843
Thereafter.................................................. 16,136
-------
$52,353
=======
</TABLE>
PURCHASE COMMITMENTS: Motorola is the principal supplier of the Company's
ESMR infrastructure equipment and handsets. During the year ended December 31,
1997, the Company acquired approximately $87,300 in infrastructure equipment and
related services from Motorola and has committed to purchase $140,000 of
additional infrastructure equipment and related services. As of December 31,
1997 the Company's consolidated balance sheets include amounts payable to
Motorola related to such purchases of $11,905 in accounts payable and $50,250 in
long-term debt (See Note 8). As of February 19, 1998, cash and cash equivalents
contractually restricted for future purchases, representing primarily Motorola
equipment, is $59,928, of which $33,525 was restricted as of December 31, 1997.
F-18
<PAGE> 87
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
FINANCING COMMITMENTS: Since March 1996, the Company has advanced Shanghai
CCT McCaw $12,483, of a total maximum commitment of $13,200, to fund the
buildout of the Shanghai GSM System. The amount outstanding as of December 31,
1997 totals $11,253, bears interest at 7% per annum and requires payments of
principal and interest in four annual installments, commencing December 31,
1997. Due to the lack of significant control over the Company's investment in
Shanghai CCT McCaw, the note is recorded as an addition to the Company's
investment in Shanghai CCT McCaw.
FINANCING GUARANTEES: In June 1997, Nextel Philippines and Motorola
entered into an equipment financing agreement (the "Philippines Motorola
Financing"), pursuant to which Motorola agreed to provide up to $14.7 million in
term loans, denominated in U.S. dollars, to Nextel Philippines to finance the
acquisition of infrastructure equipment and related services from Motorola. The
terms of the Philippines Motorola Financing provides for a maturity of two years
and an annual interest rate of LIBOR plus 506 basis points. Pursuant to the
Philippines Motorola Financing, the term loans are secured by a first priority
lien on substantially all of Nextel Philippines' assets and guarantee of such
financing by the Company. As of December 31, 1997, Nextel Philippines has
borrowed the maximum amount available under the Philippines Motorola Financing.
12. COMMON STOCK WARRANTS
In March 1997, the Company issued through a private placement, 951,463
units consisting of one 10-year senior discount note (See Note 8), and one
warrant to purchase .38748 shares of the Company's common stock (the "Warrant").
The Warrants are exercisable at a price of $9.99 per share any time after March
6, 1998 and prior to March 6, 2007. The Warrants entitle the holders to
purchase, in the aggregate, approximately 368,673 shares of the Company's common
stock which approximates 1% of the current outstanding shares on a fully diluted
basis as of December 31, 1997.
13. EMPLOYEE BENEFIT PLANS
Nextel Communications Incentive Equity Plan:
Certain of the Company's employees participate in Nextel Communications'
Incentive Equity Plan (the "Nextel Plan"). Generally, options outstanding under
the Nextel Plan (i) are granted at prices equal to or exceeding the market value
of Nextel Communications' stock on the grant date; (ii) vest ratably over either
a four or five year service period; and (iii) expire ten years subsequent to
award.
A summary of the Nextel Plan activity related to the Company's employees is
as follows:
<TABLE>
<CAPTION>
OPTION WEIGHTED AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1995....................... 81,500 $14.87 - $18.37 $15.63
Granted......................................... 59,700 15.12 15.12
Canceled........................................ (5,100) 14.87 - 15.12 14.88
------- ------ ------ ------
Outstanding, December 31, 1996....................... 136,100 15.12 - 18.37 15.44
Granted......................................... 175,550 15.12 - 23.81 15.52
------- ------ ------ ------
Outstanding, December 31, 1997....................... 311,650 $15.12 - $23.81 $15.11
======= ====== ====== ======
Exercisable, December 31, 1997....................... 55,420 $14.87 - $18.37 $15.37
======= ====== ====== ======
</TABLE>
Nextel International Employee Stock Option Plan:
On June 23, 1997, the board of directors adopted the 1997 Nextel
International Employee Stock Option Plan (the "Company Plan"), under which
certain of the Company's employees participate. Generally, options outstanding
under the Company Plan (i) are granted at fair value, based on periodic
valuations of the
F-19
<PAGE> 88
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Company using standard industry valuation techniques; (ii) vest ratably over a
four year service period; and (iii) expire ten years subsequent to award.
A summary of Company Plan activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTION AVERAGE
PRICE EXERCISE
SHARES RANGE PRICE
--------- ------ --------
<S> <C> <C> <C>
Outstanding, December 31, 1996.............................. -- $ -- $ --
Granted................................................... 1,621,000 10.00 10.00
Canceled.................................................. 30,000 10.00 10.00
--------- ------ ------
Outstanding, December 31, 1997.............................. 1,591,000 $10.00 $10.00
========= ====== ======
Exercisable, December 31, 1997.............................. -- $ -- $ --
========= ====== ======
</TABLE>
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. If the Company had
elected to recognize compensation expense based on the fair value of the awards
granted in 1997 consistent with the provisions of SFAS 123, Accounting for Stock
Based Compensation, the Company's net loss and net loss per common share for the
year ended December 31 would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Net loss:
As reported............................................... $(73,948)
========
Pro forma................................................. $(76,024)
========
Loss per common share, basic and diluted:
As reported............................................... $ (2.03)
========
Pro forma................................................. $ (2.08)
========
Weighted average fair value of options granted.............. $ 6.59
========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected stock price volatility............................. 53%
Risk-free interest rate..................................... 6.6%
Expected life of options.................................... 8 years
Expected dividend yield..................................... 0.00%
</TABLE>
The Company's stock options are not transferable, and the actual value of
the stock options that an employee may realize, if any, will depend on the
excess of the market price on the date of exercise over the exercise price. The
Company has based its assumption for stock price volatility on the historical
variance of weekly closing prices of Nextel Communications' stock. The risk-free
rate of return used equals the yield on eight year zero-coupon U.S. Treasury
issues on the grant date. No discount was applied to the value of the grants for
non-transferability or risk of forfeiture.
F-20
<PAGE> 89
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Stock Appreciation Rights:
On November 1, 1996, the Company adopted a Stock Appreciation Rights Plan
(the "SAR Plan"), which was effective as of November 1, 1995, whereby selected
employees and agents of the Company may be granted rights to share in the future
appreciation in the value of the Company. Such rights do not represent an equity
interest in the Company, only a right to compensation under the terms of the
plan.
The Company retroactively granted 1,140,000 rights under the plan, at an
exercise price of $10.00 per right, on dates ranging from October 1, 1995 to
December 31, 1996, with vesting periods of four years. Under the provisions of
the plan, the number of shares used in calculating the fair value per share is
adjusted periodically to reflect capital contributed to the Company by its
parent. This adjustment is generally only for purposes of valuing the SAR's. It
does not necessarily reflect the actual issuance of additional shares of common
stock. Rights under the plan may not be exercised until 50% of the employee's
grant has vested. As of December 31, 1996 and 1997, there were 1,240,000 and
25,000 rights outstanding, respectively. None of the rights are exercisable
under the terms of the plan.
In conjunction with the adoption of the 1997 Stock Option Plan, the board
of directors also approved a plan to terminate the SAR Plan. Each holder of SARs
granted previously has been given the option to exchange the SARs for stock
options to be granted at fair value under the 1997 Stock Option Plan. As of
December 31, 1997, 1,070,000 rights have been exchanged for options under the
1997 Stock Option Plan and 25,000 SARs remain outstanding. With respect to SAR
holders who elected not to exchange their SARs for stock options, the Company
will continue to be obligated by the terms and conditions of the SAR agreements
previously entered into with such holders.
Employee Benefit Plan:
Certain officers and employees of the Company are eligible to participate
in Nextel Communications' defined contribution plans pursuant to Section 401(k)
of the Internal Revenue Code. The Company provides a matching contribution of
$.50 for every $1.00 contributed by the employee up to 4% of each employee's
salary. Such contributions were approximately $0, $10, and $29 for the years
ended December 31, 1995, 1996 and 1997, respectively. At December 31, 1997, the
Company had no other pension or post employment benefit plans.
14. RELATED PARTIES
Nextel Communications performs certain administrative functions for the
Company, consisting of accounting, legal and other services, totaling $504 and
$318 for the years ended December 31, 1996 and 1997, respectively. No amounts
were incurred for the year ended December 31, 1995 due to the limited operations
of the Company.
At December 31, 1997, Motorola owned approximately 19.9% and 100% of Nextel
Communications' outstanding Class A and Class B common stock, respectively. The
Company maintains various business relationships with Motorola, including
purchases of infrastructure equipment and handsets, equipment financing
agreements, and joint venture partnerships (See Notes 2, 8 and 11).
F-21
<PAGE> 90
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. GEOGRAPHICAL SEGMENT INFORMATION
The Company's operations are principally located in three geographic areas:
Brazil, Argentina and Mexico. The following is a summary of data by geographic
area for the three years ended December 31, 1995, 1996 and 1997 and as of
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales to unaffiliated customers
Brazil................................................. $ -- $ -- $ 9,605
Argentina.............................................. -- -- 60
Mexico................................................. -- -- 3,348
Corporate and other.................................... -- -- 2
----- -------- ----------
$ -- $ -- $ 13,015
===== ======== ==========
Net operating loss
Brazil................................................. $ -- $ -- $ (28,436)
Argentina.............................................. (24) (2,738) (1,257)
Mexico................................................. -- -- (3,718)
Corporate and other.................................... (272) (6,748) (6,147)
----- -------- ----------
$(296) $ (9,486) $ (39,558)
===== ======== ==========
1996 1997
-------- ----------
Total assets
Brazil................................................. $ -- $ 420,242
Argentina.............................................. 22,362 --
Mexico................................................. -- 288,695
Corporate and other.................................... 177,005 414,101
-------- ----------
$199,367 $1,123,038
======== ==========
</TABLE>
The Company's investment in Nextel Mexico was accounted for under the
equity method prior to September 1, 1997. Nextel Brazil was purchased effective
January 30, 1997. Accordingly, no segmented information is reflected as of
December 31, 1996 and for the years ended December 31, 1995 and 1996 for Nextel
Brazil and Nextel Mexico.
In May 1997, the Company reduced its effective ownership interest in Nextel
Argentina to 50%; therefore, the accompanying table only includes the net sales,
operating losses and assets of Nextel Argentina prior to May 6, 1997. As the
Company's investment in Nextel Argentina is accounted for under the equity
method of accounting, as of December 31, 1997, the related asset is reflected in
Corporate and other.
Corporate and other includes operating losses relating to the selling,
general and administrative expenses of the Company's corporate offices for the
years ended December 31, 1995, 1996 and 1997. Total assets consist mainly of
cash and cash equivalents, marketable securities and investments in
unconsolidated subsidiaries at December 31, 1996 and 1997.
F-22
<PAGE> 91
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenues............................................. $ 1,460 $ 2,504 $ 3,085 $ 5,966
Operating loss....................................... (5,930) (8,571) (9,674) (15,383)
Net loss............................................. (9,811) (18,338) (20,621) (25,178)
Net loss per common share, basic and diluted......... (0.27) (0.50) (0.56) (0.69)
1996
Revenues............................................. $ -- $ -- $ -- $ --
Operating loss....................................... (829) (2,043) (3,475) (3,139)
Net loss............................................. (1,348) (2,451) (4,347) (4,330)
Net loss per common share, basic and diluted......... (0.04) (0.07) (0.12) (0.12)
</TABLE>
17. PENDING DEBT TRANSACTIONS
HIGH-YIELD OFFERING: The Company is planning to issue $300 million of
senior discount notes due 2008 (the "Notes") in March 1998. The Notes are
expected to be unsecured obligations of the Company and are expected to carry a
market interest rate. The Notes are being privately placed. The indenture
governing the Notes is expected to contain substantial covenants and
restrictions.
NEXTEL ARGENTINA FINANCING: Nextel Argentina entered into a binding
commitment letter with The Chase Manhattan Bank for a $100 million Senior
Secured credit facility (the "Argentina Financing"), primarily to fund
infrastructure equipment expenditures, development, expansion and upgrade of
network systems, and spectrum acquisitions. The Argentina Financing is subject
to the execution of definitive loan and security documentation and the
commitment letter expires on March 27, 1998. The Argentina Financing will be
repayable in quarterly installments commencing 30 months after the closing date
of the loan, with a 50% balloon payment due at the end of five years. The
Argentina Financing will bear interest at an annual rate periodically determined
by the Company of either (a) the ABR plus 2.75% (ABR is the highest of the prime
rate, the base CD rate plus 1% and the federal funds rate plus 0.5%) or (b) the
Eurodollar rate plus 3.75% (Eurodollar rate is the LIBO rate multiplied by the
statutory reserve rate). The Argentina Financing is subject to certain capital
requirements and covenants and will be secured by first priority liens on
substantially all of Nextel Argentina's assets. As of February 19, 1998, there
are no amounts outstanding on the Argentina Financing.
F-23
<PAGE> 92
NEXTEL INTERNATIONAL, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 3 $ 100,975
Marketable securities.................................. -- 128,560
Accounts receivable.................................... 383 44
Prepaid and other...................................... 48 10
-------- ---------
Total current assets.............................. 434 229,589
PROPERTY, PLANT, AND EQUIPMENT, NET......................... 200 260
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES.................. 36,405 594,471
INTANGIBLE ASSETS........................................... -- 1,512
INVESTMENTS AND OTHER ASSETS................................ 568 18,862
-------- ---------
$ 37,607 $ 844,694
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 800 $ 2,277
Accrued expenses and other............................. -- 1,532
Due to parent.......................................... 505 8,254
-------- ---------
Total current liabilities......................... 1,305 12,063
LONG-TERM DEBT.............................................. -- 539,892
COMMITMENTS AND CONTINGENCIES (NOTE 1)
STOCKHOLDERS' EQUITY:
Common stock (73,000,000 shares authorized, no par
value, 36,500,000 shares issued and outstanding)...... 65,043 395,428
Accumulated deficit.................................... (28,741) (102,689)
-------- ---------
Total stockholders' equity........................ 36,302 292,739
-------- ---------
$ 37,607 $ 844,694
======== =========
</TABLE>
See notes to condensed financial statements.
F-24
<PAGE> 93
NEXTEL INTERNATIONAL, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES.................................................... $ -- $ -- $ 3
OPERATING EXPENSES
Selling, general and administrative.................... 98 5,641 5,175
Depreciation and amortization.......................... -- 135 172
-------- -------- --------
98 5,776 5,347
-------- -------- --------
OPERATING LOSS.............................................. (98) (5,776) (5,344)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income........................................ -- 29 17,303
Interest expense....................................... -- -- (56,241)
Other, net............................................. -- 385 (15)
-------- -------- --------
-- 414 (38,953)
-------- -------- --------
LOSS BEFORE INCOME TAX PROVISION AND EQUITY IN NET LOSSES OF
SUBSIDIARIES.............................................. (98) (5,362) (44,297)
INCOME TAX PROVISION........................................ -- -- (1,931)
-------- -------- --------
LOSS BEFORE EQUITY IN NET LOSSES OF SUBSIDIARIES............ (98) (5,362) (46,228)
EQUITY IN NET LOSSES OF SUBSIDIARIES........................ (17,939) (7,114) (27,720)
-------- -------- --------
NET LOSS.................................................... $(18,037) $(12,476) $(73,948)
======== ======== ========
</TABLE>
See notes to condensed financial statements.
F-25
<PAGE> 94
NEXTEL INTERNATIONAL, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(18,037) $(12,476) $ (73,948)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and amortization.......................... 135 172
Accreted interest expense.............................. -- -- 56,241
Loss from investment in subsidiaries................... 17,939 7,114 27,720
Change in current assets and liabilities:
Accounts receivable.................................. -- (383) 339
Prepaid and other.................................... (11) (37) 38
Investments and other assets......................... -- (568) (2,221)
Accounts payable..................................... 59 741 1,477
Other................................................ 10,012 (10,012) 200
-------- -------- ---------
Net cash provided by (used in) operating
activities...................................... 9,962 (15,486) 10,018
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (36) (299) (152)
Investments in marketable securities...................... -- -- (227,957)
Disposal of marketable securities......................... -- -- 100,729
Investments in and advances to subsidiaries............... (11,517) (37,221) (246,230)
Other..................................................... -- -- (624)
-------- -------- ---------
Net cash used in investing activities............. (11,553) (37,520) (374,234)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from (repayments to) parent, net............... (18,589) 8,146 (23,556)
Capital contributions from parent......................... 20,181 44,862 6,366
Proceeds from the issuance of long-term debt.............. -- -- 467,578
Proceeds from issuance of warrants........................ -- -- 14,800
-------- -------- ---------
Net cash provided by financing activities......... 1,592 53,008 465,188
-------- -------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 1 2 100,972
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. -- 1 3
-------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 1 $ 3 $ 100,975
======== ======== =========
</TABLE>
See notes to condensed financial statements.
F-26
<PAGE> 95
NEXTEL INTERNATIONAL, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. For accounting policies and other information, see the Notes to the
Consolidated Financial Statements of Nextel International, Inc. and
Subsidiaries included elsewhere herein.
2. The parent company accounts for its investments in subsidiaries by the equity
method of accounting.
F-27
<PAGE> 96
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE, ALLOWANCE OF CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF ACQUIRED COSTS AND OTHER END
PERIOD COMPANIES(1) EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------ ------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for Doubtful
Accounts.................. $-- $3,241 $1,131 $-- $3,369 $1,003
== ====== ====== == ====== ======
Reserve for inventory
obsolescence.............. $-- $ 449 $ 885 $-- $ -- $1,334
== ====== ====== == ====== ======
</TABLE>
- ---------------
(1) Represents allowance of majority-owned subsidiaries acquired during the year
ended December 31, 1997.
F-28
<PAGE> 97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, State of Washington.
NEXTEL INTERNATIONAL, INC.
By: /s/ DAVID E. ROSTOV
------------------------------------
March 25, 1998 David E. Rostov
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ DANIEL F. AKERSON Chairman of the Board of Directors
- -----------------------------------------------
Daniel F. Akerson
/s/ KEITH D. GRINSTEIN President, Chief Executive Officer and Director
- ----------------------------------------------- (Principal Executive Officer)
Keith D. Grinstein
/s/ DAVID E. ROSTOV Vice President and Chief Financial Officer
- ----------------------------------------------- (Principal Financial and Accounting Officer)
David E. Rostov
/s/ C. JAMES JUDSON Vice Chairman of the Board of Directors
- -----------------------------------------------
C. James Judson
/s/ TIMOTHY M. DONAHUE Director
- -----------------------------------------------
Timothy M. Donahue
Director
- -----------------------------------------------
Craig O. McCaw
/s/ STEVEN M. SHINDLER Director
- -----------------------------------------------
Steven M. Shindler
/s/ DENNIS M. WEIBLING Director
- -----------------------------------------------
Dennis M. Weibling
</TABLE>
<PAGE> 98
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
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<C> <S>
3.1 Restated Articles of Incorporation of the Company.
3.2 By-laws of the Company.
4.1 Indenture, dated as of March 3, 1997, between McCaw
International, Ltd. and The Bank of New York (filed on May
7, 1997 as Exhibit No. 4.1 to the Company's Registration
Statement No. 333-26649 on Form S-4 (the "1997 Form S-4")
and incorporated herein by reference).
4.2 Form of Exchange Note (included in Exhibit 4.1).
10.1 Motorola Vendor Financing Template Memorandum of
Understanding, dated November 1996, between Motorola, Inc.,
Nextel Communications, Inc. and the Company (filed on July
18, 1997 as Exhibit No. 10.1 to Amendment No. 1 to the 1997
Form S-4 and incorporated herein by reference).
10.2 Shareholders Agreement, dated January 29, 1997, between the
Company, McCaw International (Brazil), Ltd. ("McCaw Brazil")
and the minority shareholders of McCaw Brazil (filed on July
18, 1997 as Exhibit No. 10.2 to Amendment No. 1 to the 1997
Form S-4 and incorporated herein by reference).
10.3 Amendment No. 1, dated April 27, 1997, to Shareholders
Agreement between the Company, McCaw Brazil and the minority
shareholders of McCaw Brazil (filed on July 18, 1997 as
Exhibit No. 10.3 to Amendment No. 1 to the 1997 Form S-4 and
incorporated herein by reference).
10.4 Equipment Financing Agreement, dated as of October 31, 1997,
by and between McCaw International (Brazil), Ltd. and
Motorola Credit Corporation (filed on November 14, 1997 as
Exhibit No. 10.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997 and
incorporated herein by reference).
10.5 Stockholders Agreement, dated June 21, 1996, between Infocom
Communications Network, Inc. and the shareholders of Infocom
(filed on July 18, 1997 as Exhibit No. 10.11 to Amendment
No. 1 to the 1997 Form S-4 and incorporated herein by
reference).
10.6* Employment Letter, dated November 3, 1995, between the
Company and Keith D. Grinstein (filed on July 18, 1997 as
Exhibit No. 10.12 to Amendment No. 1 to the 1997 Form S-4
and incorporated herein by reference).
10.7* Employment Letter, dated January 11, 1996, between the
Company and Brian A. Vincent (filed on July 18, 1997 as
Exhibit No. 10.14 to Amendment No. 1 to the 1997 Form S-4
and incorporated herein by reference).
10.8* Employment Letter, dated November 3, 1995, between the
Company and Heng-Pin Kiang (filed on July 18, 1997 as
Exhibit No. 10.13 to Amendment No. 1 to the 1997 Form S-4
and incorporated herein by reference).
10.9* Employment Letter, dated October 9, 1996, between the
Company and William S. Roberts. (filed on July 18, 1997 as
Exhibit No. 10.15 to Amendment No. 1 to the 1997 Form S-4
and incorporated herein by reference).
10.10* Employment Agreement, dated January 11, 1996, between the
Company and David E. Rostov (filed on July 18, 1997 as
Exhibit No. 10.16 to Amendment No. 1 to the 1997 Form S-4
and incorporated herein by reference).
10.11* Employment Letter, dated August 22, 1997, between the
Company and Thomas J. Truesdale.
10.12* McCaw International, Ltd. 1997 Stock Option Plan (filed on
July 18, 1997 as Exhibit No. 10.17 to Amendment No. 1 to the
1997 Form S-4 and incorporated herein by reference).
</TABLE>
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
<C> <S>
10.13 Tax Sharing Agreement, dated January 1, 1997, between Nextel
Communications, Inc. and its subsidiaries named therein
(filed on July 18, 1997 as Exhibit No. 10.18 to Amendment
No. 1 to the 1997 Form S-4 and incorporated herein by
reference).
10.14 Overhead Services Agreement, dated March 3, 1997, between
Nextel Communications, Inc. and the Company (filed on July
18, 1997 as Exhibit No. 10.19 to Amendment No. 1 to the 1997
Form S-4 and incorporated herein by reference).
10.15 Right of First Opportunity Agreement, dated March 6, 1997,
between Nextel Communications, Inc. and the Company (filed
on July 18, 1997 as Exhibit No. 10.20 to Amendment No. 1 to
the 1997 Form S-4 and incorporated herein by reference).
10.16 Indemnification Agreement, dated March 6, 1997, between
Nextel Communications, Inc. and the Company (filed on July
18, 1997 as Exhibit No. 10.21 to Amendment No. 1 to the 1997
Form S-4 and incorporated herein by reference).
21. Subsidiaries of the Company.
27. Financial Data Schedule (filed on March 2, 1997 as Exhibit
27 to the Company's Current Report on Form 8-K dated March
2, 1998 and incorporated herein by reference).
</TABLE>
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*Management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
NEXTEL INTERNATIONAL, INC.
Pursuant to RCW 23B.10.070, the following constitutes Restated
Articles of Incorporation of the undersigned, a Washington corporation. These
Restated Articles of Incorporation correctly set forth without change the
corresponding provisions of the Articles of Incorporation as heretofore amended
and supersede the original Articles of Incorporation and all amendments thereto.
ARTICLE I. NAME
The name of this corporation is Nextel International, Inc.
ARTICLE II. PURPOSES
This corporation is organized to engage in any business, trade or
activity which may be conducted lawfully by a corporation organized
under the Washington Business Corporation Act.
ARTICLE III. SHARES
This corporation is authorized to issue a total of
73,003,750 shares of all classes of capital stock, divided into three
classes as follows:
73,000,000 shares of common stock without par value
1,250 shares of Series A Exchangeable Redeemable Preferred
Stock, par value $10.00
2,500 shares of Series B Redeemable Preferred Stock, par
value $10.00
A. Terms Of Series A Exchangeable Redeemable Preferred
Stock
1. Series A Stated Value.
1.1 Each share of Series A Exchangeable Redeemable
Preferred Stock (the "Series A Preferred Stock") will have a stated
liquidation value of $100,000 (the "Series A Stated Value"), which
Series A Stated Value will increase annually as set forth in Section
1.2.
PAGE 1
<PAGE> 2
This corporation will issue fractional shares of Series A Preferred
Stock upon the original issuance, transfer or exchange of a Series A
Preferred Stock share, unless this corporation and the holder of such
Series A Preferred Stock share agree upon a payment in lieu of any
such fractional share.
1.2 The Series A Stated Value will increase at an annual
rate of accretion equal to 13.625% (the "Rate of Accretion"), which
increase will be calculated semiannually on June 30 and on December
31 of each year during which any shares of Series A Preferred Stock
remain outstanding (each a "Semiannual Calculation Date"). All such
increases will be cumulative and will be calculated by multiplying
the Series A Stated Value as of the immediately prior Semiannual
Calculation Date (or in the case of the first semiannual increase on
June 30, 1998, by the original Series A Stated Value as set forth in
Section 1.1) by 106.8125%, the product of which will constitute the
Series A Stated Value until the next such semiannual calculation. All
calculations required hereunder will be computed on the basis of a
360-day year of 12 30-day months.
2. Dividends. The Series A Preferred Stock has no profit
participation or dividend rights, except as required by law.
3. Series A Liquidation Rights.
3.1 In the event of any liquidation, dissolution or winding
up of the business of this corporation, whether voluntary or
involuntary, each holder of Series A Preferred Stock is entitled to
receive, for each share thereof, out of assets of this corporation
legally available therefor, a preferential amount in cash equal to
(and not more than) the sum of (A) the Series A Stated Value as of
the immediately prior Semiannual Calculation Date, plus (B) an amount
equal to the amount of all legally required dividends or
distributions thereon, if any, payable pursuant to Section 2, plus
(C) any Interim Accreted Value. "Interim Accreted Value" means, for
purposes of this Section 3.1, an amount equal to (i) the Rate of
Accretion expressed as a daily rate from the immediately prior
Semiannual Calculation Date through the effective date of the
liquidation, dissolution or winding up, multiplied by (ii) the Series
A Stated Value as of the immediately prior Semiannual Calculation
Date. All preferential amounts to be paid to the holders of any
outstanding shares of Series A Preferred Stock and Series B Preferred
Stock in
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<PAGE> 3
connection with a liquidation, dissolution or winding up will be paid
before the payment or setting apart for payment of any amount for, or
the distribution of any assets of this corporation to, the holders of
(x) any series of Preferred Stock whose terms provide that the
holders of Series A Preferred Stock should receive preferential
payment with respect to such distribution (to the extent of such
preference) or (y) common stock. If in any such distribution the
assets of this corporation are insufficient to pay the holders of the
outstanding shares of the Series A Preferred Stock (and the holders
of any Series B Preferred Stock and any other class or series of
capital stock ranking on a parity with the Series A Preferred Stock
as to distributions in the event of a liquidation, dissolution or
winding up of this corporation) the full amounts to which they may be
entitled, such holders will share ratably in any distribution of
assets in accordance with the sums which would be payable on such
distribution if all sums payable thereon were paid in full. In
liquidation, shares of Series A Preferred Stock and Series B
Preferred Stock will rank on a pari passu basis.
3.2 Holders of shares of Series A Preferred Stock will not
be entitled to receive any amounts with respect to any liquidation,
dissolution or winding up of this corporation other than the amounts
provided in this Section 3. Neither a merger nor consolidation of
this corporation into or with another corporation nor a merger or
consolidation of any other corporation into or with this corporation,
nor a sale, transfer, mortgage, pledge or lease of all or any part of
the assets of this corporation will be deemed to be a liquidation,
dissolution or winding up of this corporation for purposes of this
Section 3.
4. Series A Voting Rights.
4.1 On matters as to which they are entitled to vote, the
holders of Series A Preferred Stock will be entitled to the number of
votes per share (calculated as of the date of any such vote) that is
equal to the Series A Stated Value as of the immediately prior
Semiannual Calculation Date divided by 100,000. The holders of Series
A Preferred Stock will vote separately as a class on all matters as
to which they are entitled to vote, except as otherwise provided
herein. Any action that may be taken hereunder by the holders of the
Series A Preferred Stock at a meeting may be taken by the written
consent of the holders of shares of Series A Preferred Stock
outstanding and entitled to vote thereon.
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<PAGE> 4
4.2 Unless it has been approved by the vote of the holders
of a majority of the shares of Series A Preferred Stock and Series B
Preferred Stock outstanding, voting together as if they constituted a
single class, no amendment to the Restated Articles of Incorporation
of this corporation can become effective if it (A) creates or
authorizes the creation of any class or series of capital stock
(other than the Series B Preferred Stock) ranking on parity with or
superior to the Series A Preferred Stock or the Series B Preferred
Stock in any respect or (B) alters or changes the powers, preferences
or rights of shares of Series A Preferred Stock or Series B Preferred
Stock in a manner adverse to the holders of Series A Preferred Stock
and Series B Preferred Stock.
4.3 Unless holders of a majority of the shares of Series A
Preferred Stock and Series B Preferred Stock outstanding, voting
together as if they constituted a single class, have given their
approval, this corporation is not authorized to merge, reorganize,
recapitalize, consolidate or consummate a share exchange (each a
"Transaction") if (A) the GAAP Net Worth of the successor or
resulting entity on a pro forma basis after giving effect to the
Transaction (and any related transactions) is not equal to or greater
than the GAAP Net Worth of this corporation immediately prior to the
Transaction, or (B) the priority of the Series A Preferred Stock or
the Series B Preferred Stock in the capital stock of the successor or
resulting entity will rank on parity with or junior to any class or
series of capital stock that has been created or issued without the
approval of the Series A Preferred Stock and the Series B Preferred
Stock pursuant to Section 4.2. "GAAP Net Worth" means the net worth
of this corporation or any successor or resulting entity, as the case
may be, calculated in accordance with generally accepted accounting
principles, as in effect from time to time, on a basis consistent
with past practice.
4.4 No dividend or other distribution will be declared or
paid on the common stock or any other stock of this corporation
ranking junior to or ranking pari passu with the Series A Preferred
Stock (except any outstanding Series B Preferred Stock) without the
prior consent of the holders of a majority of the shares of Series A
Preferred Stock outstanding, and until any legally required
dividends or distributions owing on the Series A Preferred Stock
have been paid in full.
PAGE 4
<PAGE> 5
4.5 In addition to the voting rights set forth herein, the
holders of Series A Preferred Stock will be entitled to exercise such
voting rights as may be provided to them under Washington law to the
extent such voting rights are not inconsistent with those set forth
herein. Nothing herein should be read or construed as limiting such
voting rights.
5. Exchange for Series B Preferred Stock.
5.1 Series A Exchange Right.
5.1.1 Each holder of Series A Preferred Stock may, at any
time following a Exchange Trigger Event, exchange any or all of such
holder's shares of Series A Preferred Stock into such number of fully
paid and non-assessable shares of Series B Preferred Stock as equals
(A) the sum of the Series A Stated Value as of the immediately prior
Semiannual Calculation Date plus any Interim Accreted Value of such
Series A Preferred Stock, multiplied by (B) the number of shares of
Series A Preferred Stock being exchanged, divided by (C) the Series B
Stated Value (as defined in Section 1 of the Terms of Series B
Redeemable Preferred Stock). For purposes of this Section 5.1.1,
"Interim Accreted Value" means an amount equal to (i) the Rate of
Accretion expressed as a daily rate from the immediately prior
Semiannual Calculation Date through the date of exchange, multiplied
by (ii) the Series A Stated Value as of the immediately prior
Semiannual Calculation Date. To the extent necessary, this
corporation will issue fractional shares of Series B Preferred Stock
upon any exchange pursuant to this Section 5, unless this corporation
and the holder of the Series A Preferred Stock being exchanged agree
upon a payment in lieu of any such fractional share. In order to
exercise the exchange privilege under this Section 5.1.1, a holder of
shares of Series A Preferred Stock must give written notice to this
corporation at its principal office stating the holder's name and
address and the number of shares of Series A Preferred Stock such
holder elects to exchange.
5.1.2 "Exchange Trigger Event" means (A) the
recapitalization or reorganization of this corporation; (B) a
registered, underwritten public offering of any capital stock of this
corporation; (C) the sale or other disposition by Nextel
Communications, Inc., a Delaware corporation ("Nextel
Communications") or a wholly owned subsidiary of Nextel
Communications, of shares of common stock of this
PAGE 5
<PAGE> 6
corporation or (D) the issuance of shares of common stock by this
corporation, such that following any event covered by clause (A),
(B), (C) or (D) above, Nextel Communications owns less than fifty
percent (50%) of this corporation's outstanding shares of common
stock.
5.1.3 At such time as any certificate or certificates
representing the Series A Preferred Stock that has been exchanged are
surrendered to this corporation, this corporation will issue and
deliver a certificate or certificates representing the appropriate
number of shares of Series B Preferred Stock (calculated pursuant to
Section 5.1.1) to each former holder of Series A Preferred Stock
participating in the exchange. In case of the exchange under Section
5.1.1 of only a part of the shares of Series A Preferred Stock
represented by a certificate surrendered to this corporation, this
corporation will forthwith issue and deliver a new certificate for
the number of shares of Series A Preferred Stock that have not been
exchanged. Until any certificate or certificates representing Series
A Preferred Stock that has been exchanged are surrendered and a
certificate or certificates representing the Series B Preferred Stock
into which such Series A Preferred Stock has been exchanged has been
issued and delivered, the certificate or certificates representing
the shares of Series A Preferred Stock that have been exchanged will
represent the shares of Series B Preferred Stock into which such
shares of Series A Preferred Stock have been exchanged. This
corporation will pay all documentary, stamp or similar issue or
transfer tax, if any, due on the issue of shares of Series B
Preferred Stock issuable upon exchange of the Series A Preferred
Stock.
6. Redemption.
6.1 Corporation's Right to Redeem. This corporation may (A)
in its sole discretion and at any time, redeem all shares of the
Series A Preferred Stock outstanding or (B) with the prior consent of
the affected holders of such shares outstanding, redeem a portion of
the Series A Preferred Stock then outstanding, on a pro rata basis,
in either case at a total per share redemption price equal to the sum
of the Series A Stated Value as of the immediately prior Semiannual
Calculation Date plus any Interim Accreted Value. "Interim Accreted
Value," for purposes of this Section 6.1, means an amount equal to
(i) the Rate of Accretion expressed as a daily rate from the
immediately prior Semiannual Calculation Date through the Series A
Redemption Date, multiplied by
PAGE 6
<PAGE> 7
(ii) the Series A Stated Value as of the immediately prior Semiannual
Calculation Date.
6.2 Series A Redemption Notice.
6.2.1 Subject to the requirements of Section 6.1, this
corporation may call all or a portion of the outstanding shares of
Series A Preferred Stock for redemption and set a date for the
redemption (the "Series A Redemption Date"). Notice of such proposed
redemption (the "Series A Redemption Notice") must be mailed at least
45 days prior to the Series A Redemption Date to all holders of
shares of Series A Preferred Stock at their respective addresses as
the same appear on the stock record books of this corporation. Each
Series A Redemption Notice will state (A) the Series A Redemption
Date, (B) the Series A Redemption Price, (C) the place or places
where such shares of Series A Preferred Stock are to be surrendered,
and (D) that legally required dividends or distributions, if any, on
shares of Series A Preferred Stock to be redeemed will cease to
accrue on the Series A Redemption Date. No defect in any such notice
as to any shares of Series A Preferred Stock will affect the
proceedings for the redemption of any shares of Series A Preferred
Stock.
6.2.2 Upon surrender in accordance with the Series A
Redemption Notice of the certificates for any shares of Series A
Preferred Stock so redeemed (properly endorsed or assigned for
transfer, if the Board of Directors so requires and the notice so
states), such shares of Series A Preferred Stock will be redeemed by
this corporation, which will make payment to the surrendering holder
in an amount equal to the product of the applicable Series A
Redemption Price multiplied by the number of shares of Series A
Preferred Stock being surrendered by such holder for redemption.
6.3 Payment Prior to Series A Redemption Date.
6.3.1 If a Series A Redemption Notice is duly given as
provided for above, or if this corporation has given to the bank or
trust company hereinafter referred to irrevocable authorization to
give or complete such Series A Redemption Notice, and if prior to the
applicable Series A Redemption Date the funds necessary for such
redemption have been deposited by this corporation with a bank or
trust company in good standing (which bank or trust company will have
been identified in a
PAGE 7
<PAGE> 8
written notice given to the holders whose shares of Series A
Preferred Stock are to be redeemed), organized under the laws of the
United States of America or a State thereof, having a capital surplus
and undivided profits aggregating at least $100,000,000 according to
its last published statement of condition, in trust for the pro rata
benefit of the holders of the shares of Series A Preferred Stock so
called for or otherwise subject to redemption, so as to be, and to
continue to be, available therefor, then, notwithstanding that any
certificate for shares of Series A Preferred Stock so called for or
otherwise subject to redemption may not have been surrendered for
cancellation, all shares of Series A Preferred Stock so called for or
otherwise subject to redemption will no longer be deemed to be
outstanding on and after such Series A Redemption Date, and all
rights with respect to such shares will forthwith cease and terminate
at the close of business on such Series A Redemption Date, except
only the right of the holders thereof to receive, out of the funds so
set aside in trust, the amount payable on redemption thereof, without
interest. Any interest accrued on any funds so deposited will be the
property of this corporation and will be paid to this corporation
from time to time.
6.3.2 Any funds set aside or deposited, as the case may be,
in accordance with Section 6.3.1 that remain unclaimed at the end of
one year from the applicable Series A Redemption Date will be
released or repaid to this corporation, after which the holders of
the shares of Series A Preferred Stock so called for redemption will
look only to this corporation for payment of the amount payable on
redemption thereof, without interest, subject to the applicable law
of escheat.
7. Other Provisions.
7.1 Issuance of Shares. This corporation will not issue, or
enter into any commitment to issue, shares of Series A Preferred
Stock except (A) pursuant to the terms of any agreement in effect on
the date that the Articles of Amendment of the Restated Articles of
Incorporation of this corporation establishing the powers,
preferences and rights of the Series A Preferred Stock were
originally filed with the Secretary of State of the State of
Washington, or (B) such other issuances or issuance commitments as
have been approved in advance by the vote of the holders of a
majority of the shares of Series A Preferred Stock and Series B
Preferred Stock outstanding, voting together as if they constituted a
single class.
PAGE 8
<PAGE> 9
7.2 Cancellation of Shares of Series A Preferred Stock. No
share or shares of Series A Preferred Stock acquired by this
corporation for any reason can be reissued, and all such shares will
be canceled, retired and eliminated from the shares of Series A
Preferred Stock which this corporation is authorized to issue.
7.3 Reservation of Shares. This corporation will at all
times reserve from its authorized Series B Preferred Stock a
sufficient number of shares to provide for exchange of all shares of
Series A Preferred Stock from time to time outstanding.
7.4 Notices. This corporation will provide to each holder
of shares of Series A Preferred Stock a copy of any materials
delivered to the holders of any other shares of this corporation's
capital stock by or on behalf of this corporation at the same time
such materials are being delivered to such other holders.
7.5 Record Holders. This corporation and its transfer
agent, if any, for the shares of Series A Preferred Stock, may deem
and treat the record holder of any shares of Series A Preferred Stock
as the sole true and lawful owner thereof for all purposes, and
neither this corporation nor any such transfer agent will be affected
by any notice to the contrary.
B. Terms of Series B Redeemable Preferred Stock
1. Series B Stated Value. Each share of Series B Redeemable
Preferred Stock (the "Series B Preferred Stock") will have a
liquidation preference at a stated value, calculated at the time the
first share(s) of Series A Preferred Stock are exchanged into
share(s) of Series B Preferred Stock, equal to the Series A Stated
Value as of the immediately prior Semiannual Calculation Date plus an
amount equal to any Interim Accreted Value (the "Series B Stated
Value"). "Interim Accreted Value," for the purposes of this Section
1, means an amount equal to (i) the Rate of Accretion expressed as a
daily rate from the immediately prior Semiannual Calculation Date
through the date of exchange, multiplied by (ii) the Series A Stated
Value as of the immediately prior Semiannual Calculation Date. This
corporation will issue fractional shares of Series B Preferred Stock
upon the original issuance, transfer or exchange of a Series B
Preferred Stock share, unless this corporation and the holder of such
Series B Preferred Stock
PAGE 9
<PAGE> 10
share agree upon a payment in lieu of any such fractional share. All
future issuances of Series B Preferred Stock, following the first
such issuance, will be made at the Series B Stated Value.
2. Dividends.
2.1(a) Beginning on their date of issuance, holders of
Series B Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available
therefor, dividends on each share of Series B Preferred Stock
outstanding held by them, at a rate per annum equal to 13.625% of the
Series B Stated Value, or a daily rate of 0.0378% of the Series B
Stated Value (the "Daily Rate"). Such dividends will be cumulative,
whether or not earned or declared, and will be payable quarterly in
arrears on March 31, June 30 and September 30, December 31 (each a
"Distribution Date") of each year or portion thereof ending on or
prior to March 12, 2010 (such twelve-year period, the "Initial Term")
during which any shares of Series B Preferred Stock remain
outstanding and also shall be payable in arrears on March 12, 2010
with respect to the period from January 1, 2010 to March 12, 2010 if
any shares of Series B Preferred Stock remain outstanding.
(b) During each twelve-month period beginning on March 13,
2010 and on each subsequent March 13 (each, a "Subsequent Year"),
holders of Series B Preferred Stock will be entitled to receive,
when, as and if declared by the Board of Directors, out of funds
legally available therefor, dividends on each share of Series B
Preferred Stock outstanding held by them, at a rate per annum equal
to 18.00% of the Series B Stated Value, or a daily rate of 0.0500% of
the Series B Stated Value (the "Subsequent Year Daily Rate"). Such
dividends will be cumulative, whether or not earned or declared, and
will be payable on June 12, September 12, and December 12, March 12
in each such Subsequent Year, commencing on June 12, 2010 (each, a
"Subsequent Year Distribution Date") if any shares of Series B
Preferred Stock remain outstanding.
2.2 Dividends on the Series B Preferred Stock will be will
be computed on the basis of a 360-day year of twelve 30-day months.
2.3 References herein to the "Appropriate Year" shall mean
a year during the Initial Term or a Subsequent Year, as appropriate
to the context. References herein to the "Appropriate Daily Rate"
shall mean
PAGE 10
<PAGE> 11
the Daily Rate or a Subsequent Year Daily Rate, as appropriate to the
context. References herein to an "Appropriate Distribution Date"
shall mean a Distribution Date or a Subsequent Year Distribution
Date, as appropriate to the context.
3. Series B Liquidation Rights.
3.1 In the event of any liquidation, dissolution or winding
up of the business of this corporation, whether voluntary or
involuntary, each holder of Series B Preferred Stock will be entitled
to receive, for each share thereof, out of assets of this corporation
legally available therefor, a preferential amount in cash equal to
(and not more than) the sum of (A) the Series B Stated Value plus (B)
an amount equal to the amount of all declared (or due to be
declared), but unpaid dividends or distributions thereon, if any,
payable pursuant to Section 2.1 during each Appropriate Year, plus an
amount equal to the Appropriate Daily Rate multiplied by the Series B
Stated Value, multiplied by the number of days since the immediately
prior Appropriate Distribution Date. All preferential amounts to be
paid to the holders of any outstanding shares of Series B Preferred
Stock and Series A Preferred Stock in connection with such
liquidation, dissolution or winding up will be paid before the
payment or setting apart for payment of any amount for, or the
distribution of any assets of this corporation to, the holders of (i)
any other series of preferred stock whose terms provide that the
holders of Series B Preferred Stock should receive preferential
payment with respect to such distribution (to the extent of such
preference) or (ii) common stock. If in any such distribution the
assets of this corporation are insufficient to pay the holders of the
outstanding shares of the Series B Preferred Stock (and the holders
of any Series A Preferred Stock and any class or series of capital
stock ranking on a parity with the Series B Preferred Stock as to
distributions in the event of a liquidation, dissolution or winding
up of this corporation) the full amounts to which they may be
entitled, such holders will share ratably in any distribution of
assets in accordance with the sums which would be payable upon such
distribution if all sums payable thereon were paid in full. In
liquidation, shares of Series B Preferred Stock and Series A
Preferred Stock will rank on a pari passu basis.
3.2 Holders of shares of Series B Preferred Stock will not
be entitled to receive any amounts with respect to any liquidation,
dissolution or winding up of this corporation other than the amounts
PAGE 11
<PAGE> 12
provided in this Section 3. Neither a merger nor consolidation of
this corporation into or with another corporation nor a merger or
consolidation of any other corporation into or with this corporation,
nor a sale, transfer, mortgage, pledge or lease of all or any part of
the assets of this corporation will be deemed to be a liquidation,
dissolution or winding up of this corporation for purposes of this
Section 3.
4. Series B Voting Rights.
4.1 On all matters as to which they are entitled to vote,
the holders of Series B Preferred Stock will be entitled to the
number of votes per share (calculated as of the date of any such
vote) that is equal to the Series B Stated Value divided by 100,000.
The holders of Series B Preferred Stock will vote separately as a
class on all matters as to which they are entitled to vote, except as
otherwise provided herein. Any action that may be taken hereunder by
the holders of the Series B Preferred Stock at a meeting may be taken
by the written consent of the holders of shares of Series B Preferred
Stock outstanding and entitled to vote thereon.
4.2 Immediately following the issuance of any shares of
Series B Preferred Stock, the number of Directors constituting the
Board of Directors will be adjusted to permit the holders of the
majority of the then outstanding shares of Series B Preferred Stock,
voting separately as a class, to elect one additional Director to the
Board of Directors (the "Series B Director"). The Series B Director's
initial term will expire at the next regularly scheduled meeting of
the holders of the common stock of this corporation, at which meeting
the holders of shares of Series B Preferred Stock outstanding voting
separately as a class will be entitled to elect one Director. Any
individual elected to the Board of Directors by vote of the Series B
Preferred Stock pursuant to this Section 4.2 is referred to herein as
a "Series B Director."
4.3 A Series B Director may only be removed from office by
the vote of the holders of a majority of shares of Series B Preferred
Stock outstanding, voting separately as a class. Except as set forth
in Section 4.7, any vacancy for the Series B Director position may be
filled only by the vote of the holders of a majority of shares of
Series B Preferred Stock outstanding, voting separately as a class.
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4.4 If dividends on the Series B Preferred Stock are in
arrears and unpaid for four consecutive quarterly periods or for any
six quarterly periods (whether or not consecutive) (each, a "Dividend
Default"), then the number of Directors constituting the Board of
Directors will be adjusted to permit the holders of the majority of
the then outstanding shares of Series B Preferred Stock, voting
separately as a class, to elect an additional Director (the "Series B
Default Director"). For the purpose of determining the number of
quarterly periods for which accrued dividends have not been paid, any
accrued and unpaid dividend that is subsequently paid will not be
treated as unpaid.
4.5 The right of the holders of Series B Preferred Stock to
elect the Series B Default Director as described above will continue
until such time as all accumulated dividends that are in arrears on
the Series B Preferred Stock are paid in full, at which time the term
of any Series B Default Director elected pursuant to Section 4.4
hereof will terminate and the number of Directors constituting the
Board of Directors will be reduced to the number necessary to reflect
the termination of the right of the holders of the Series B Preferred
Stock to elect a Series B Default Director, subject always to the
same provisions for the renewal and divestment of such special voting
rights in the case of any future Dividend Default. At any time after
voting power to elect a Series B Default Director has become vested
and is continuing in the holders of shares of the Series B Preferred
Stock pursuant to Section 4.4 hereof, or if a vacancy exists in the
office of the Series B Default Director elected by the holders of
shares of the Series B Preferred Stock, an officer of this
corporation may, and upon the written request of the record holders
of at least 25% of the shares of Series B Preferred Stock then
outstanding addressed to the secretary of this corporation must, call
a special meeting of the holders of the Series B Preferred Stock, for
the purpose of electing a new Series B Default Director. If such
meeting is called by an officer of this corporation within 30 days
after personal service of said written request upon the secretary of
this corporation, or within 30 days after mailing the same within the
United States by certified mail, addressed to the secretary of this
corporation at its principal executive offices, then the holders of
record of at least 25% of the shares of the Series B Preferred Stock
outstanding may designate in writing one of their number to call such
meeting at the expense of this corporation, and such meeting may be
called by the person so designated upon the notice required for the
annual meetings of
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shareholders of this corporation and will be held at the place for
holding the annual meetings of shareholders or such other place in
the United States as may be designated in such notice.
Notwithstanding the provisions of this Section 4.5, no such special
meeting need be called if any such request is received less than 40
days before the day fixed for the next ensuing annual or special
meeting of shareholders of this corporation. This corporation will
provide any holder of shares of the Series B Preferred Stock so
designated access to the lists of holders of shares of the Series B
Preferred Stock for purposes of calling a meeting pursuant to the
provisions of this Section 4.5.
4.6 At any meeting held for the purpose of electing a
Series B Director or a Series B Default Director, the presence in
person or by proxy of the holders of at least a majority of the
shares of Series B Preferred Stock outstanding will be required to
constitute a quorum of such Series B Preferred Stock.
4.7 Any vacancy occurring in the office of the Series B
Director can be filled by a then serving Series B Default Director,
if any, and any vacancy occurring in the office of the Series B
Default Director, if applicable, can be filled by any then serving
Series B Director, in either case unless and until the holders of a
majority of the shares of Series B Preferred Stock outstanding elect
another person to fill any such vacancy.
4.8 Upon the redemption of the last share of Series B
Preferred Stock then outstanding, the number of Directors
constituting the Board of Directors will be adjusted to eliminate any
then existing Series B Director or Series B Default Director seats,
subject always to the provisions of this Section 4 for the renewal
and divestment of such special Series B Preferred Stock voting rights
on the subsequent issuance of any shares of Series B Preferred Stock.
4.9 Unless it has been approved by the vote of the holders
of a majority of shares of Series A Preferred Stock and Series B
Preferred Stock outstanding, each voting together as if they
constituted a single class, no amendment to the Restated Articles of
Incorporation of this corporation can become effective if it (A)
creates or authorizes the creation of any class or series of capital
stock (other than the Series A Preferred Stock) ranking on parity
with or superior to the Series A Preferred Stock or the Series B
Preferred Stock in any respect or (B)
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<PAGE> 15
alters or changes the powers, preferences or rights of shares of
Series B Preferred Stock in a manner adverse to the holders of the
Series A Preferred Stock or the Series B Preferred Stock.
4.10 Unless holders of a majority of shares of Series A
Preferred Stock and Series B Preferred Stock outstanding, voting
together as if they constituted a single class, have given their
approval, this corporation is not authorized to participate or engage
in any Transaction if (A) the GAAP Net Worth of the successor or
resulting entity on a pro forma basis after giving effect to the
Transaction (and any related transactions) is not equal to or greater
than the GAAP Net Worth of this corporation immediately prior to the
Transaction or (B) the priority of the Series B Preferred Stock in
the capital stock of the successor or resulting entity is on parity
with or junior to any class or series of capital stock that has been
created or issued without the approval of the Series A Preferred
Stock and Series B Preferred Stock pursuant to Section 4.9.
4.11 No dividend or other distribution will be declared or
paid on the common stock or any other stock of this corporation
ranking junior to or ranking pari passu with the Series B Preferred
Stock (except as required by law on any outstanding Series A
Preferred Stock) without the prior consent of the holders of a
majority of the shares of Series B Preferred Stock outstanding and
until any dividends or distributions owing on the Series B Preferred
Stock have been paid in full.
4.12 In addition to the voting rights set forth herein, the
holders of Series B Preferred Stock will be entitled to exercise such
voting rights as may be provided to them under Washington law to the
extent such voting rights are not inconsistent with those set forth
herein. Nothing herein should be read or construed as limiting such
voting rights.
5. Redemption of Series B Preferred Stock.
5.1 Corporation's Right to Redeem. This corporation may (A)
in its sole discretion and at any time, redeem all shares of the
Series B Preferred Stock outstanding, or (B) with the consent of the
holders of a majority of such shares outstanding, redeem a portion of
the Series B Preferred Stock then outstanding, on a pro rata basis,
in either case at a total per share redemption price equal to the sum
of the Series B Stated Value, plus an amount equal to the amount of
all declared (or due to be
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declared), but unpaid dividends or distributions thereon, if any,
payable pursuant to Section 2.1, through the immediately prior
Appropriate Distribution Date, plus an amount equal to the product of
the Appropriate Daily Rate multiplied by the Series B Stated Value,
multiplied by the number of days since the immediately prior
Appropriate Distribution Date (the "Series B Redemption Price").
5.2 Series B Redemption Notice.
5.2.1 Subject to the provisions of Section 5.1, this
corporation may call all or a portion of the outstanding shares of
Series B Preferred Stock for redemption and set a date for the
redemption (the "Series B Redemption Date"). Notice of a proposed
redemption pursuant to Section 5.1 (each such notice a "Series B
Redemption Notice") must be mailed at least 45 days prior to the
Series B Redemption Date to all holders of shares of Series B
Preferred Stock at their respective addresses as the same appear on
the stock record books of this corporation. Each Series B Redemption
Notice will state (A) the Series B Redemption Date, (B) the Series B
Redemption Price, (C) the place or places where such shares of Series
B Preferred Stock are to be surrendered, and (D) that dividends on
shares of Series B Preferred Stock to be redeemed will cease to
accrue on the Series B Redemption Date. No defect in any such notice
as to any shares of Series B Preferred Stock will affect the
proceedings for the redemption of any shares of Series B Preferred
Stock.
5.2.2 Upon surrender in accordance with the Series B
Redemption Notice of the certificates for any shares of Series B
Preferred Stock so redeemed (properly endorsed or assigned for
transfer, if the Board of Directors so requires and the notice so
states), such shares of Series B Preferred Stock will be redeemed by
this corporation, which will make payment to the surrendering holder
in an amount equal to the product of the applicable Series B
Redemption Price, multiplied by the number of shares of Series B
Preferred Stock being surrendered by such holder for redemption.
5.3 Payment Prior to Series B Redemption Date.
5.3.1 If a Series B Redemption Notice is duly given as
provided for above, or if this corporation has given to the bank or
trust company hereinafter referred to irrevocable authorization to
give or complete such
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Series B Redemption Notice, and if prior to the applicable Series B
Redemption Date the funds necessary for such redemption will have
been deposited by this corporation with a bank or trust company in
good standing (which bank or trust company will have been identified
in a written notice given to the holders whose shares of Series B
Preferred Stock are to be redeemed), organized under the laws of the
United States of America or a State thereof, having a capital surplus
and undivided profits aggregating at least $100,000,000 according to
its last published statement of condition, in trust for the pro rata
benefit of the holders of the shares of Series B Preferred Stock so
called for or otherwise subject to redemption, so as to be, and to
continue to be, available therefor, then, notwithstanding that any
certificate for shares of Series B Preferred Stock so called for or
otherwise subject to redemption may not have been surrendered for
cancellation, all shares of Series B Preferred Stock so called for or
otherwise subject to redemption will no longer be deemed to be
outstanding on and after such Series B Redemption Date and all rights
with respect to such shares will forthwith cease and terminate at the
close of business on such Series B Redemption Date, except only the
right of the holders thereof to receive, out of the funds so set
aside in trust, the amount payable on redemption thereof, without
interest. Any interest accrued on any funds so deposited will be the
property of this corporation and will be paid to this corporation
from time to time.
5.3.2 Any funds set aside or deposited, as the case may be,
in accordance with Section 5.3.1 that remain unclaimed at the end of
one year from the applicable Series B Redemption Date will be
released or repaid to this corporation, after which the holders of
the shares of Series B Preferred Stock so called for redemption will
look only to this corporation for payment of the amount payable on
redemption thereof, without interest, subject to the applicable law
of escheat.
6. Other Provisions.
6.1 Issuance of Shares. This corporation will not issue, or
enter into any commitment to issue, shares of Series B Preferred
Stock except (A) in exchange of shares of Series A Preferred Stock on
the terms and subject to the conditions set forth in the Terms of
Series A Exchangeable Redeemable Preferred Stock, or (B) such other
issuances or issuance as have been approved in advance by the vote of
the holders of a majority of the shares of any Series A Preferred
Stock and Series B
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Preferred Stock outstanding, voting together as if they constituted a
single class.
6.2 Cancellation of Shares of Series B Preferred Stock. No
share or shares of Series B Preferred Stock acquired by this
corporation for any reason will be reissued, and all such shares will
be canceled, retired and eliminated from the shares of Series B
Preferred Stock which this corporation is authorized to issue.
6.3 Reservation of Shares. This corporation will at all
times reserve from its authorized Series B Preferred Stock a
sufficient number of shares to provide for exchange of all shares of
Series A Preferred Stock from time to time outstanding..
6.4 Notices. This corporation will provide to each holder
of shares of Series B Preferred Stock a copy of any materials
delivered to the holders of any other shares of this corporation's
capital stock by or on behalf of this corporation at the same time
such materials are being delivered to such other holders.
6.5 Record Holders. This corporation and its transfer
agent, if any, for the Series B Preferred Stock, may deem and treat
the record holder of any shares of Series B Preferred Stock as the
sole true and lawful owner thereof for all purposes, and neither this
corporation nor any such transfer agent will be affected by any
notice to the contrary.
ARTICLE IV. NO PREEMPTIVE RIGHTS
Except as may otherwise be provided by the Board of Directors, no
preemptive rights shall exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
ARTICLE V. NO CUMULATIVE VOTING
At each election for directors, every shareholder entitled to vote at
such election has the right to vote in person or by proxy the number
of shares held by such shareholder for as many persons as there are
directors to be elected. No cumulative voting for directors shall be
permitted.
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ARTICLE VI. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal
the Bylaws or adopt new Bylaws. Nothing herein shall deny the
concurrent power of the shareholders to adopt, alter, amend or repeal
the Bylaws.
ARTICLE VII. REGISTERED AGENT AND OFFICE
The name of the registered agent of this corporation and the address
of its registered office are Lawco of Washington, Inc., 1201 Third
Avenue, 40th Floor, Seattle, Washington 98101-3099.
ARTICLE VIII. DIRECTORS
The number of directors of this corporation shall be determined in
the manner specified by the Bylaws and may be increased or decreased
from time to time in the manner provided therein. At the time of the
restatement of these Articles of Incorporation, the following persons
are serving as the directors of this corporation are as follows:
<TABLE>
<CAPTION>
Name Address
---- ----------
<S> <C>
Daniel F. Akerson 1505 Farm Credit Drive
McLean, VA 22102
Timothy M. Donahue 1505 Farm Credit Drive
McLean, VA 22102
Keith D. Grinstein 1191 Second Avenue, Suite 1600
Seattle, WA 98101
C. James Judson 2320 Carillon Point
Kirkland, WA 98033
Craig O. McCaw 2320 Carillon Point
Kirkland, WA 98033
Steven M. Shindler 1505 Farm Credit Drive
McLean, VA 22102
</TABLE>
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<PAGE> 20
<TABLE>
<S> <C>
Dennis M. Weibling 2320 Carillon Point
Kirkland, WA 98033
</TABLE>
ARTICLE IX. INCORPORATOR
The name and address of the incorporator is as follows:
<TABLE>
Name Address
---- -------
<S> <C>
C. James Judson 2600 Century Square
1501 4th Avenue
Seattle, WA 98101-1688
</TABLE>
ARTICLE X. LIMITATION OF DIRECTORS' LIABILITY
A director shall have no liability to the corporation or its
shareholders for monetary damages for conduct as a director, except
for acts or omissions that involve intentional misconduct or for
conduct violating RCW 23B.08.302, or for any transaction from which
the director will personally receive a benefit in money, property or
services to which the director is not legally entitled. If the
Washington Business Corporation Act is hereafter amended to authorize
corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director shall be
eliminated or limited to the full extent permitted by the Washington
Business Corporation Act, as so amended. Any repeal or modification
of this Article shall not adversely affect any right or protection of
a director of the corporation existing at the time of such repeal or
modification occurring prior to such repeal or modification.
These Restated Articles of Incorporation do not contain an amendment
to the Articles of Incorporation.
These Restated Articles of Incorporation do not contain any amendment
to the Articles of Incorporation requiring shareholder approval. The date of
adoption of the Restated Articles of Incorporation by the Board of Directors is
March 11, 1998.
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These Restated Articles of Incorporation are executed by said
corporation by its duly authorized officer.
DATED March 17, 1998.
NEXTEL INTERNATIONAL, INC.
By /s/ HENG-PIN KIANG
--------------------------
Heng-Pin Kiang
Vice President
PAGE 21
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CERTIFICATE ACCOMPANYING
RESTATED ARTICLES OF INCORPORATION
OF
NEXTEL INTERNATIONAL, INC.
Pursuant to RCW 23B.10.070, the foregoing constitutes Restated
Articles of Incorporation of the undersigned, a Washington corporation. The
Restated Articles of Incorporation supersede the original Articles of
Incorporation and all amendments thereto.
The Restated Articles of Incorporation do not contain an amendment to
the Articles of Incorporation and were duly adopted by the Board of Directors.
This certificate accompanying the Restated Articles of Incorporation
is executed by said corporation by its duly authorized officer.
DATED March 17, 1998.
NEXTEL INTERNATIONAL, INC.
By /s/ HENG-PIN KIANG
--------------------------
Heng-Pin Kiang
Vice President
PAGE 22
<PAGE> 1
EXHIBIT 3.2
RESTATED BYLAWS
OF
NEXTEL INERNATIONAL, INC.
AS OF NOVEMBER 14, 1997
<PAGE> 2
AMENDMENTS
<TABLE>
<CAPTION>
Date of
Section Effect of Amendment Amendment
------- ------------------- ---------
<S> <C> <C>
3.17 Addition of Audit Committee 11/14/97
</TABLE>
Page i
<PAGE> 3
CONTENTS
<TABLE>
<S> <C>
SECTION 1. OFFICES................................................................1
SECTION 2. SHAREHOLDERS...........................................................1
2.1 Annual Meeting.........................................................1
2.2 Special Meetings.......................................................1
2.3 Meetings by Communication Equipment....................................1
2.4 Date, Time and Place of Meeting........................................2
2.5 Notice of Meeting......................................................2
2.6 Waiver of Notice.......................................................2
2.7 Fixing of Record Date for Determining Shareholders.....................3
2.8 Voting Record..........................................................3
2.9 Quorum.................................................................3
2.10 Manner of Acting......................................................4
2.11 Proxies...............................................................4
2.12 Voting of Shares......................................................4
2.13 Voting for Directors..................................................4
2.14 Action by Shareholders Without a Meeting..............................5
SECTION 3. BOARD OF DIRECTORS.....................................................5
3.1 General Powers.........................................................5
3.2 Number and Tenure......................................................5
3.3 Annual and Regular Meetings............................................6
3.4 Special Meetings.......................................................6
3.5 Meetings by Communications Equipment...................................6
3.6 Notice of Special Meetings.............................................6
3.6.1 Personal Delivery............................................6
3.6.2 Delivery by Mail.............................................6
3.6.3 Delivery by Private Carrier..................................7
3.6.4 Facsimile Notice.............................................7
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
3.6.5 Delivery by Telegraph........................................7
3.6.6 Oral Notice..................................................7
3.7 Waiver of Notice.......................................................7
3.7.1 In Writing..................................................7
3.7.2 By Attendance................................................8
3.8 Quorum.................................................................8
3.9 Manner of Acting.......................................................8
3.10 Presumption of Assent.................................................8
3.11 Action by Board or Committees Without a Meeting.......................8
3.12 Resignation...........................................................9
3.13 Removal...............................................................9
3.14 Vacancies.............................................................9
3.15 Executive and Other Committees........................................9
3.15.1 Creation of Committees......................................9
3.15.2 Authority of Committees.....................................10
3.15.3 Quorum and Manner of Acting.................................10
3.15.4 Minutes of Meetings.........................................10
3.15.5 Resignation.................................................10
3.15.6 Removal.....................................................11
3.16 Compensation..........................................................11
3.17 Audit Committee.......................................................11
SECTION 4. OFFICERS...............................................................11
4.1 Appointment and Term...................................................11
4.2 Resignation............................................................12
4.3 Removal................................................................12
4.4 Contract Rights of Officers............................................12
4.5 Chairman of the Board..................................................12
4.6 President..............................................................12
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C>
4.7 Vice President.........................................................13
4.8 Secretary..............................................................13
4.9 Treasurer..............................................................13
4.10 Salaries..............................................................13
SECTION 5. CERTIFICATES FOR SHARES AND THEIR TRANSFER.............................14
5.1 Issuance of Shares.....................................................14
5.2 Certificates for Shares................................................14
5.3 Stock Records..........................................................14
5.4 Restriction on Transfer................................................14
5.5 Transfer of Shares.....................................................15
5.6 Lost or Destroyed Certificates.........................................15
SECTION 6. BOOKS AND RECORDS......................................................15
SECTION 7. SEAL...................................................................16
SECTION 8. INDEMNIFICATION........................................................16
8.1 Right to Indemnification...............................................16
8.2 Restrictions on Indemnification........................................17
8.3 Advancement of Expenses................................................17
8.4 Right of Indemnitee to Bring Suit......................................18
8.5 Procedures Exclusive...................................................18
8.6 Nonexclusivity of Rights...............................................18
8.7 Insurance, Contracts and Funding.......................................18
8.8 Indemnification of Employees and Agents of the Corporation.............19
8.9 Persons Serving Other Entities.........................................19
SECTION 9. AMENDMENTS.............................................................19
</TABLE>
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<PAGE> 6
BYLAWS
SECTION 1. OFFICES
The principal office of the corporation shall be located at the
principal place of business or such other place as the Board of Directors
("Board") may designate. The corporation may have such other offices, either
within or without the State of Washington, as the Board may designate or as the
business of the corporation may require from time to time.
SECTION 2. SHAREHOLDERS
2.1 ANNUAL MEETING
The annual meeting of the shareholders shall be held during the month
of January in each year at on a date chosen by the President or the Board for
the purpose of electing Directors and transacting such other business as may
properly come before the meeting. If the day fixed for the annual meeting is a
legal holiday at the place of the meeting, the meeting shall be held on the
next succeeding business day.
2.2 SPECIAL MEETINGS
The Chairman of the Board, the President or the Board may call special
meetings of the shareholders for any purpose. Further, a special meeting of the
shareholders shall be held if the holders of not less than 10% of all the votes
entitled to be cast on any issue proposed to be considered at such special
meeting have dated, signed and delivered to the Secretary one or more written
demands for such meeting, describing the purpose or purposes for which it is to
be held.
2.3 MEETINGS BY COMMUNICATION EQUIPMENT
Shareholders may participate in any meeting of the shareholders by any
means of communication by which all persons participating in the meeting can
hear each other during the meeting. Participation by such means shall
constitute presence in person at a meeting
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2.4 DATE, TIME AND PLACE OF MEETING
Except as otherwise provided herein, all meetings of shareholders,
including those held pursuant to demand by shareholders as provided herein,
shall be held on such date and at such time and place, within or without the
State of Washington, designated by or at the direction of the Board.
2.5 NOTICE OF MEETING
Written notice stating the place, day and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called shall be given by or at the direction of the Board, the Chairman of the
Board, the President or the Secretary to each shareholder entitled to notice of
or to vote at the meeting not less than 10 nor more than 60 days before the
meeting, except that notice of a meeting to act on an amendment to the Articles
of Incorporation, a plan of merger or share exchange, the sale, lease, exchange
or other disposition of all or substantially all of the corporation's assets
other than in the regular course of business or the dissolution of the
corporation shall be given not less than 20 nor more than 60 days before such
meeting. Such notice may be transmitted by mail, private carrier, personal
delivery, telegraph, teletype or communications equipment which transmits a
facsimile of the notice to like equipment which receives and reproduces such
notice. If these forms of written notice are impractical in the view of the
Board, the Chairman of the Board, the President or the Secretary, written
notice may be transmitted by an advertisement in a newspaper of general
circulation in the area of the corporation's principal office. If such notice
is mailed, it shall be deemed effective when deposited in the official
government mail, first-class postage prepaid, properly addressed to the
shareholder at such shareholder's address as it appears in the corporation's
current record of shareholders. Notice given in any other manner shall be
deemed effective when dispatched to the shareholder's address, telephone number
or other number appearing on the records of the corporation. Any notice given
by publication as herein provided shall be deemed effective five days after
first publication.
2.6 WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder under
the provisions of these Bylaws, the Articles of Incorporation or the Washington
Business Corporation Act, a waiver thereof in writing, signed by the person or
persons entitled to such notice and delivered to the corporation, whether
before or after the date and time of the meeting, shall be deemed equivalent to
the giving of such notice. Further, notice of the time, place and purpose of
any meeting will be deemed to be waived by any shareholder by attendance
thereat in person or by proxy, unless such shareholder
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at the beginning of the meeting objects to holding the meeting or transacting
business at the meeting.
2.7 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS
For the purpose of determining shareholders entitled (a) to notice of
or to vote at any meeting of shareholders or any adjournment thereof, (b) to
demand a special meeting, or (c) to receive payment of any dividend, or in
order to make a determination of shareholders for any other purpose, the Board
may fix a future date as the record date for any such determination. Such
record date shall be not more than 70 days, and in case of a meeting of
shareholders not less than 10 days prior to the date on which the particular
action requiring such determination is to be taken. If no record date is fixed
for the determination of shareholders entitled to notice of or to vote at a
meeting, the record date shall be the day immediately preceding the date on
which notice of the meeting is first given to shareholders. Such a
determination shall apply to any adjournment of the meeting unless the Board
fixes a new record date, which it shall do if the meeting is adjourned to a
date more than 120 days after the date fixed for the original meeting. If no
record date is set for the determination of shareholders entitled to receive
payment of any stock dividend or distribution (other than one involving a
purchase, redemption, or other acquisition of the corporation's shares) the
record date shall be the date the Board authorizes the stock dividend or
distribution.
2.8 VOTING RECORD
At least 10 days before each meeting of shareholders, an alphabetical
list of the shareholders entitled to notice of such meeting shall be made,
arranged by voting group and by each class or series of shares therein, with
the address of and number of shares held by each shareholder. This record shall
be kept at the principal office of the corporation for 10 days prior to such
meeting, and shall be kept open at such meeting, for the inspection of any
shareholder or any shareholder's agent.
2.9 QUORUM
A majority of the votes entitled to be cast on a matter by the holders
of shares that, pursuant to the Articles of Incorporation or the Washington
Business Corporation Act, is entitled to vote and be counted collectively upon
such matter, represented in person or by proxy, shall constitute a quorum of
such shares at a meeting of shareholders. If less than a majority of such votes
is represented at a meeting, a majority of the votes so represented may adjourn
the meeting from time to time without further notice if the new date, time or
place is announced at the meeting
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<PAGE> 9
before adjournment. Any business may be transacted at a reconvened meeting that
might have been transacted at the meeting as originally called, provided a
quorum is present or represented thereat. Once a share is represented for any
purpose at a meeting other than solely to object to holding the meeting or
transacting business thereat, it is deemed present for quorum purposes for the
remainder of the meeting and any adjournment thereof (unless a new record date
is or must be set for the adjourned meeting) notwithstanding the withdrawal of
enough shareholders to leave less than a quorum.
2.10 MANNER OF ACTING
If a quorum is present, action on a matter other than the election of
Directors shall be approved if the votes cast in favor of the action by the
shares entitled to vote and be counted collectively upon such matter exceed the
votes cast against such action by the shares entitled to vote and be counted
collectively thereon, unless the Articles of Incorporation or the Washington
Business Corporation Act require a greater number of affirmative votes.
2.11 PROXIES
A shareholder may vote by proxy executed in writing by the shareholder
or by his or her attorney-in-fact or agent. Such proxy shall be effective when
received by the Secretary or other officer or agent authorized to tabulate
votes. A proxy shall become invalid 11 months after the date of its execution,
unless otherwise provided in the proxy. A proxy with respect to a specified
meeting shall entitle the holder thereof to vote at any reconvened meeting
following adjournment of such meeting but shall not be valid after the final
adjournment thereof.
2.12 VOTING OF SHARES
Except as provided in the Articles of Incorporation or in Section 2.13
hereof, each outstanding share entitled to vote with respect to a matter
submitted to a meeting of shareholders shall be entitled to one vote upon such
matter.
2.13 VOTING FOR DIRECTORS
Each shareholder entitled to vote at an election of Directors may vote,
in person or by proxy, the number of shares owned by such shareholder for as
many persons as there are Directors to be elected and for whose election such
shareholder has a right to vote. Unless otherwise provided in the Articles of
Incorporation, the candidates
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elected shall be those receiving the largest number of votes cast, up to the
number of Directors to be elected.
2.14 ACTION BY SHAREHOLDERS WITHOUT A MEETING
Any action which could be taken at a meeting of the shareholders may be
taken without a meeting if one or more written consents setting forth the
action so taken are signed by all shareholders entitled to vote on the action
and are delivered to the corporation. If not otherwise fixed by the Board, the
record date for determining shareholders entitled to take action without a
meeting is the date the first shareholder signs the consent. A shareholder may
withdraw a consent only by delivering a written notice of withdrawal to the
corporation prior to the time that all consents are in the possession of the
corporation. Action taken by written consent of shareholders without a meeting
is effective when all consents are in the possession of the corporation, unless
the consent specifies a later effective date. Any such consent shall be
inserted in the minute book as if it were the minutes of a meeting of the
shareholders.
SECTION 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS
All corporate powers shall be exercised by or under the authority of,
and the business and affairs of the corporation shall be managed under the
direction of, the Board, except as may be otherwise provided in these Bylaws,
the Articles of Incorporation or the Washington Business Corporation Act.
3.2 NUMBER AND TENURE
The Board shall be composed of not less than one nor more than ten
Directors, the specific number to be set by resolution of the Board or the
shareholders. The number of Directors may be changed from time to time by
amendment to these Bylaws, but no decrease in the number of Directors shall
have the effect of shortening the term of any incumbent Director. Unless a
Director dies, resigns, or is removed, his or her term of office shall expire
at the next annual meeting of shareholders; provided, however, that a Director
shall continue to serve until his or her successor is elected or until there is
a decrease in the authorized number of Directors. Directors need not be
shareholders of the corporation or residents of the State of Washington, and
need not meet any other qualifications.
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3.3 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without notice immediately after
and at the same place as the annual meeting of shareholders. By resolution the
Board, or any committee thereof, may specify the time and place either within
or without the State of Washington for holding regular meetings thereof without
notice other than such resolution.
3.4 SPECIAL MEETINGS
Special meetings of the Board or any committee designated by the Board
may be called by or at the request of the Chairman of the Board, the President,
the Secretary or, in the case of special Board meetings, any one Director and,
in the case of any special meeting of any committee designated by the Board, by
the Chairman thereof. The person or persons authorized to call special meetings
may fix any place either within or without the State of Washington as the place
for holding any special Board or committee meeting called by them.
3.5 MEETINGS BY COMMUNICATIONS EQUIPMENT
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by, or conduct the meeting
through the use of, any means of communication by which all Directors
participating in the meeting can hear each other during the meeting.
Participation by such means shall constitute presence in person at a meeting.
3.6 NOTICE OF SPECIAL MEETINGS
Notice of a special Board or committee meeting stating the place, day
and hour of the meeting shall be given to a Director in writing or orally.
Neither the business to be transacted at, nor the purpose of, any special
meeting need be specified in the notice of such meeting.
3.6.1 PERSONAL DELIVERY
If notice is given by personal delivery, the notice shall be effective
if delivered to a Director at least two days before the meeting.
3.6.2 DELIVERY BY MAIL
If notice is delivered by mail, the notice shall be deemed effective if
deposited in the official government mail at least five days before the
meeting, properly
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addressed to a Director at his or her address shown on the records of the
corporation, with postage thereon prepaid.
3.6.3 DELIVERY BY PRIVATE CARRIER
If notice is given by private carrier, the notice shall be deemed
effective when dispatched to a Director at his or her address shown on the
records of the corporation at least three days before the meeting.
3.6.4 FACSIMILE NOTICE
If notice is delivered by wire or wireless equipment which transmits a
facsimile of the notice, the notice shall be deemed effective when dispatched
at least two days before the meeting to a Director at his or her telephone
number or other number appearing on the records of the corporation.
3.6.5 DELIVERY BY TELEGRAPH
If notice is delivered by telegraph, the notice shall be deemed
effective if the content thereof is delivered to the telegraph company for
delivery to a Director at his or her address shown on the records of the
corporation at least three days before the meeting.
3.6.6 ORAL NOTICE
If notice is delivered orally, by telephone or in person, the notice
shall be deemed effective if personally given to the Director at least two days
before the meeting.
3.7 WAIVER OF NOTICE
3.7.1 IN WRITING
Whenever any notice is required to be given to any Director under the
provisions of these Bylaws, the Articles of Incorporation or the Washington
Business Corporation Act, a waiver thereof in writing, signed by the person or
persons entitled to such notice and delivered to the corporation, whether
before or after the date and time of the meeting, shall be deemed equivalent to
the giving of such notice. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board or any committee
designated by the Board need be specified in the waiver of notice of such
meeting.
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3.7.2 BY ATTENDANCE
A Director's attendance at or participation in a Board or committee
meeting shall constitute a waiver of notice of such meeting, unless the
Director at the beginning of the meeting, or promptly upon his or her arrival,
objects to holding the meeting or transacting business thereat and does not
thereafter vote for or assent to action taken at the meeting.
3.8 QUORUM
A majority of the number of Directors fixed by or in the manner
provided in these Bylaws shall constitute a quorum for the transaction of
business at any Board meeting but, if less than a majority is present at a
meeting, a majority of the Directors present may adjourn the meeting from time
to time without further notice.
3.9 MANNER OF ACTING
If a quorum is present when the vote is taken, the act of the majority
of the Directors present at a Board meeting shall be the act of the Board,
unless the vote of a greater number is required by these Bylaws, the Articles
of Incorporation or the Washington Business Corporation Act.
3.10 PRESUMPTION OF ASSENT
A Director of the corporation who is present at a Board or committee
meeting at which any action is taken shall be deemed to have assented to the
action taken unless (a) the Director objects at the beginning of the meeting,
or promptly upon the Director's arrival, to holding the meeting or transacting
any business thereat, (b) the Director's dissent or abstention from the action
taken is entered in the minutes of the meeting, or (c) the Director delivers
written notice of the Director's dissent or abstention to the presiding officer
of the meeting before its adjournment or to the corporation within a reasonable
time after adjournment of the meeting. The right of dissent or abstention is
not available to a Director who votes in favor of the action taken.
3.11 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action which could be taken at a meeting of the Board or of any
committee created by the Board may be taken without a meeting if one or more
written consents setting forth the action so taken are signed by each of the
Directors or by each committee member either before or after the action is
taken and delivered to the corporation. Action taken by written consent of
Directors without a meeting is
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effective when the last Director signs the consent, unless the consent
specifies a later effective date. Any such written consent shall be inserted in
the minute book as if it were the minutes of a Board or a committee meeting.
3.12 RESIGNATION
Any Director may resign at any time by delivering written notice to the
Chairman of the Board, the President, the Secretary or the Board. Any such
resignation is effective upon delivery thereof unless the notice of resignation
specifies a later effective date and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
3.13 REMOVAL
At a meeting of shareholders called expressly for that purpose, one or
more members of the Board, including the entire Board, may be removed with or
without cause (unless the Articles of Incorporation permit removal for cause
only) by the holders of the shares entitled to elect the Director or Directors
whose removal is sought if the number of votes cast to remove the Director
exceeds the number of votes cast not to remove the Director.
3.14 VACANCIES
Unless the Articles of Incorporation provide otherwise, any vacancy
occurring on the Board may be filled by the shareholders, the Board or, if the
Directors in office constitute fewer than a quorum, by the affirmative vote of
a majority of the remaining Directors. Any vacant office held by a Director
elected by the holders of one or more classes or series of shares entitled to
vote and be counted collectively thereon shall be filled only by the vote of
the holders of such class or series of shares. A Director elected to fill a
vacancy shall serve only until the next election of Directors by the
shareholders.
3.15 EXECUTIVE AND OTHER COMMITTEES
3.15.1 CREATION OF COMMITTEES
The Board, by resolution adopted by the greater of a majority of the
Directors then in office and the number of Directors required to take action in
accordance with these Bylaws, may create standing or temporary committees,
including an Executive Committee, and appoint members thereto from its own
number and invest such committees with such powers as it may see fit, subject
to such conditions as may be
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prescribed by the Board, these Bylaws and applicable law. Each committee must
have two or more members, who shall serve at the pleasure of the Board.
3.15.2 AUTHORITY OF COMMITTEES
Each committee shall have and may exercise all of the authority of the
Board to the extent provided in the resolution of the Board creating the
committee and any subsequent resolutions pertaining thereto and adopted in like
manner, except that no such committee shall have the authority to: (1)
authorize or approve a distribution except according to a general formula or
method prescribed by the Board, (2) approve or propose to shareholders actions
or proposals required by the Washington Business Corporation Act to be approved
by shareholders, (3) fill vacancies on the Board or any committee thereof, (4)
adopt, amend or repeal Bylaws, (5) amend the Articles of Incorporation pursuant
to RCW 23B.10.020, (6) approve a plan of merger not requiring shareholder
approval, or (7) authorize or approve the issuance or sale or contract for sale
of shares, or determine the designation and relative rights, preferences and
limitations of a class or series of shares except that the Board may authorize
a committee or a senior executive officer of the corporation to do so within
limits specifically prescribed by the Board.
3.15.3 QUORUM AND MANNER OF ACTING
A majority of the number of Directors composing any committee of the
Board, as established and fixed by resolution of the Board, shall constitute a
quorum for the transaction of business at any meeting of such committee but, if
less than a majority is present at a meeting, a majority of such Directors
present may adjourn the meeting from time to time without further notice.
Except as may be otherwise provided in the Washington Business Corporation Act,
if a quorum is present when the vote is taken the act of a majority of the
members present shall be the act of the committee.
3.15.4 MINUTES OF MEETINGS
All committees shall keep regular minutes of their meetings and shall
cause them to be recorded in books kept for that purpose.
3.15.5 RESIGNATION
Any member of any committee may resign at any time by delivering
written notice thereof to the Chairman of the Board, the President, the
Secretary or the Board. Any such resignation is effective upon delivery
thereof, unless the notice of
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resignation specifies a later effective date, and the acceptance of such
resignation shall not be necessary to make it effective.
3.15.6 REMOVAL
The Board may remove any member of any committee elected or appointed
by it but only by the affirmative vote of the greater of a majority of the
Directors then in office and the number of Directors required to take action in
accordance with these Bylaws.
3.16 COMPENSATION
By Board resolution, Directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, or a fixed
sum for attendance at each Board or committee meeting, or a stated salary as
Director or a committee member, or a combination of the foregoing. No such
payment shall preclude any Director or committee member from serving the
corporation in any other capacity and receiving compensation therefor.
3.17 AUDIT COMMITTEE.
The Audit Committee shall consist of two or more Directors. The members
of the Audit Committee shall be designated and appointed by the Board. The
Audit Committee may review with the corporation's management the internal
auditors and the independent auditors the corporation's policies and procedures
with respect to internal control; review significant accounting matters,
approve the audited financial statements prior to distribution, approve any
significant changes in the corporation's accounting principles or financial
reporting practices, review independent auditor services, and recommend to the
Board of Directors the firm of independent auditors to audit the corporation's
consolidated financial statements. (THIS SECTION ADDED 11/14/97 BY VOTE OF THE
BOARD OF DIRECTORS.)
SECTION 4. OFFICERS
4.1 APPOINTMENT AND TERM
The officers of the corporation shall be those officers appointed from
time to time by the Board or by any other officer empowered to do so. The Board
shall have sole power and authority to appoint executive officers. As used
herein, the term "executive officer" shall mean the President, any Vice
President in charge of a principal business unit, division or function or any
other officer who performs a policy-making function. The Board or the President
may appoint such other officers
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and assistant officers to hold office for such period, have such authority and
perform such duties as may be prescribed. The Board may delegate to any other
officer the power to appoint any subordinate officers and to prescribe their
respective terms of office, authority and duties. Any two or more offices may
be held by the same person. Unless an officer dies, resigns or is removed from
office, he or she shall hold office until his or her successor is appointed.
4.2 RESIGNATION
Any officer may resign at any time by delivering written notice thereof
to the corporation. Any such resignation is effective upon delivery thereof,
unless the notice of resignation specifies a later effective date, and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
4.3 REMOVAL
Any officer may be removed by the Board at any time, with or without
cause. An officer or assistant officer, if appointed by another officer, may be
removed by any officer authorized to appoint officers or assistant officers.
4.4 CONTRACT RIGHTS OF OFFICERS
The appointment of an officer does not itself create contract rights.
4.5 CHAIRMAN OF THE BOARD
If appointed, the Chairman of the Board shall perform such duties as
shall be assigned to him or her by the Board from time to time and shall
preside over meetings of the Board and shareholders unless another officer is
appointed or designated by the Board as chairman of such meetings. In the
abesnce of the Chairman of the Board, the Vice Chairman (or the President if no
Vice Chairman has been appointed) shall perform the duties of the Chairman of
the Board.
4.6 PRESIDENT
If appointed, the President shall be the chief executive officer of the
corporation unless some other officer is so designated by the Board, shall
preside over meetings of the Board and shareholders in the absence of the
Chairman of the Board and Vice Chairman, and, subject to the Board's control,
shall supervise and control all of the assets, business and affairs of the
corporation. In general, the President shall perform all duties incident to the
office of President and such other duties as are prescribed by the Board from
time to time. If no Secretary has been appointed, the
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President shall have responsibility for the preparation of minutes of meetings
of the Board and shareholders and for authentication of the records of the
corporation.
4.7 VICE PRESIDENT
In the event of the death of the President or his or her inability to
act, the Vice President who is designated by the Board as the successor to the
President, or if no Vice President is so designated, the Vice President first
elected to office, shall perform the duties of the President, except as may be
limited by resolution of the Board, with all the powers of and subject to all
the restrictions upon the President. Vice Presidents shall perform such other
duties as from time to time may be assigned to them by the President or by or
at the direction of the Board.
4.8 SECRETARY
If appointed, the Secretary shall be responsible for preparation of
minutes of the meetings of the Board and shareholders, maintenance of the
corporation records and stock registers, and authentication of the
corporation's records and shall in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him or her by the President or by or at the direction of the Board. In the
absence of the Secretary, an Assistant Secretary may perform the duties of the
Secretary.
4.9 TREASURER
If appointed, the Treasurer shall have charge and custody of and be
responsible for all funds and securities of the corporation, receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in
banks, trust companies or other depositories selected in accordance with the
provisions of these Bylaws, and in general perform all of the duties incident
to the office of Treasurer and such other duties as from time to time may be
assigned to him or her by the President or by or at the direction of the Board.
In the absence of the Treasurer, an Assistant Treasurer may perform the duties
of the Treasurer. If required by the Board, the Treasurer or any Assistant
Treasurer shall give a bond for the faithful discharge of his or her duties in
such amount and with such surety or sureties as the Board shall determine.
4.10 SALARIES
The salaries of the officers shall be fixed from time to time by the
Board or by any person or persons to whom the Board has delegated such
authority. No officer
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shall be prevented from receiving such salary by reason of the fact that he or
she is also a Director of the corporation.
SECTION 5. CERTIFICATES FOR SHARES AND THEIR TRANSFER
5.1 ISSUANCE OF SHARES
No shares of the corporation shall be issued unless authorized by the
Board, or by a committee designated by the Board to the extent such committee
is empowered to do so.
5.2 CERTIFICATES FOR SHARES
Certificates representing shares of the corporation shall be signed,
either manually or in facsimile, by any two officers of the corporation and
shall include on their face written notice of any restrictions which may be
imposed on the transferability of such shares. All certificates shall be
consecutively numbered or otherwise identified.
5.3 STOCK RECORDS
The stock transfer books shall be kept at the principal office of the
corporation or at the office of the corporation's transfer agent or registrar.
The name and address of each person to whom certificates for shares are issued,
together with the class and number of shares represented by each such
certificate and the date of issue thereof, shall be entered on the stock
transfer books of the corporation. The person in whose name shares stand on the
books of the corporation shall be deemed by the corporation to be the owner
thereof for all purposes.
5.4 RESTRICTION ON TRANSFER
Except to the extent that the corporation has obtained an opinion of
counsel acceptable to the corporation that transfer restrictions are not
required under applicable securities laws, or has otherwise satisfied itself
that such transfer restrictions are not required, all certificates representing
shares of the corporation shall bear a legend on the face of the certificate,
or on the reverse of the certificate if a reference to the legend is contained
on the face, which reads substantially as follows:
"The securities evidenced by this certificate have not been
registered under the Securities Act of l933, as amended, or any
applicable state law, and no interest therein may be sold,
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distributed, assigned, offered, pledged or otherwise transferred
unless (a) there is an effective registration statement under
such Act and applicable state securities laws covering any such
transaction involving said securities or (b) this corporation
receives an opinion of legal counsel for the holder of these
securities (concurred in by legal counsel for this corporation)
stating that such transaction is exempt from registration or
this corporation otherwise satisfies itself that such
transaction is exempt from registration."
5.5 TRANSFER OF SHARES
The transfer of shares of the corporation shall be made only on the
stock transfer books of the corporation pursuant to authorization or document
of transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed
and filed with the Secretary of the corporation. All certificates surrendered
to the corporation for transfer shall be cancelled and no new certificate shall
be issued until the former certificates for a like number of shares shall have
been surrendered and cancelled.
5.6 LOST OR DESTROYED CERTIFICATES
In the case of a lost, destroyed or mutilated certificate, a new
certificate may be issued therefor upon such terms and indemnity to the
corporation as the Board may prescribe.
SECTION 6. BOOKS AND RECORDS
The corporation shall:
(a) Keep as permanent records minutes of all meetings of its
shareholders and the Board, a record of all actions taken by the shareholders
or the Board without a meeting, and a record of all actions taken by a
committee of the Board exercising the authority of the Board on behalf of the
corporation.
(b) Maintain appropriate accounting records.
(c) Maintain a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders, in
alphabetical order by class of shares showing the number and class of shares
held by each; provided, however, such record may be maintained by an agent of
the corporation.
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(d) Maintain its records in written form or in another form capable of
conversion into written form within a reasonable time.
(e) Keep a copy of the following records at its principal office:
1. the Articles of Incorporation and all amendments thereto as
currently in effect;
2. the Bylaws and all amendments thereto as currently in
effect;
3. the minutes of all meetings of shareholders and records of
all action taken by shareholders without a meeting, for the
past three years;
4. the financial statements described in Section 23B.16.200(1)
of the Washington Business Corporation Act, for the past
three years;
5. all written communications to shareholders generally within
the past three years;
6. a list of the names and business addresses of the current
Directors and officers; and
7. the most recent annual report delivered to the Washington
Secretary of State.
SECTION 7. SEAL
The Board may provide for a corporate seal which shall consist of the
name of the corporation, the state of its incorporation and the year of its
incorporation.
SECTION 8. INDEMNIFICATION
8.1 RIGHT TO INDEMNIFICATION
Each person who was, is or is threatened to be made a named party to or
is otherwise involved (including, without limitation, as a witness) in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
Director or officer of the corporation or, that being or having been such a
Director or officer or an employee of the corporation, he or she is or was
serving at the request of the corporation as a
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Director, officer, partner, trustee, employee or agent of another corporation
or of a partnership, joint venture, trust, employee benefit plan or other
enterprise (hereinafter an "indemnitee"), whether the basis of a proceeding is
alleged action in an official capacity as such a Director, officer, partner,
trustee, employee or agent or in any other capacity while serving as such a
Director, officer, partner, trustee, employee or agent, shall be indemnified
and held harmless by the corporation against all expense, liability and loss
(including counsel fees, judgments, fines, ERISA excise taxes or penalties and
amounts to be paid in settlement) actually and reasonably incurred or suffered
by such indemnitee in connection therewith, and such indemnification shall
continue as to an indemnitee who has ceased to be a Director, officer, partner,
trustee, employee or agent and shall inure to the benefit of the indemnitee's
heirs, executors and administrators. Except as provided in subsection 8.2 of
this Section with respect to proceedings seeking to enforce rights to
indemnification, the corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee
only if a proceeding (or part thereof) was authorized or ratified by the Board.
The right to indemnification conferred in this Section shall be a contract
right.
8.2 RESTRICTIONS ON INDEMNIFICATION
No indemnification shall be provided to any such indemnitee for acts or
omissions of the indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law, for conduct of the indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the Washington Business Corporation Act,
for any transaction with respect to which it was finally adjudged that such
indemnitee personally received a benefit in money, property or services to
which the indemnitee was not legally entitled or if the corporation is
otherwise prohibited by applicable law from paying such indemnification, except
that if Section 23B.08.560 or any successor provision of the Washington
Business Corporation Act is hereafter amended, the restrictions on
indemnification set forth in this subsection 8.2 shall be as set forth in such
amended statutory provision.
8.3 ADVANCEMENT OF EXPENSES
The right to indemnification conferred in this Section shall include
the right to be paid by the corporation the expenses incurred in defending any
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"). An advancement of expenses shall be made upon delivery to the
corporation of an undertaking (hereinafter an "undertaking"), by or on behalf
of such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial
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decision from which there is no further right to appeal that such indemnitee is
not entitled to be indemnified for such expenses under this subsection 8.3.
8.4 RIGHT OF INDEMNITEE TO BRING SUIT
If a claim under subsection 8.1 or 8.3 of this Section is not paid in
full by the corporation within sixty days after a written claim has been
received by the corporation, except in the case of a claim for an advancement
of expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim. If successful in whole or in part, in
any such suit or in a suit brought by the corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. The
indemnitee shall be presumed to be entitled to indemnification under this
Section upon submission of a written claim (and, in an action brought to
enforce a claim for an advancement of expenses, where the required undertaking
has been tendered to the corporation) and thereafter the corporation shall have
the burden of proof to overcome the presumption that the indemnitee is so
entitled.
8.5 PROCEDURES EXCLUSIVE
Pursuant to Section 23B.08.560(2) or any successor provision of the
Washington Business Corporation Act, the procedures for indemnification and
advancement of expenses set forth in this Section are in lieu of the procedures
required by Section 23B.08.550 or any successor provision of the Washington
Business Corporation Act.
8.6 NONEXCLUSIVITY OF RIGHTS
The right to indemnification and the advancement of expenses conferred
in this Section shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Articles of
Incorporation or Bylaws of the corporation or the parent company of this
corporation (if any), general or specific action of the Board, contract or
otherwise.
8.7 INSURANCE, CONTRACTS AND FUNDING
The corporation may maintain insurance, at its expense, to protect
itself and any Director, officer, partner, trustee, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense,
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liability or loss, whether or not the corporation would have the power to
indemnify such person against such expense, liability or loss under the
Washington Business Corporation Act. The corporation may enter into contracts
with any Director, officer, partner, trustee, employee or agent of the
corporation in furtherance of the provisions of this Section and may create a
trust fund, grant a security interest or use other means (including, without
limitation, a letter of credit) to ensure the payment of such amounts as may be
necessary to effect indemnification as provided in this Section.
8.8 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
The corporation may, by action of the Board, grant rights to
indemnification and advancement of expenses to employees and agents or any
class or group of employees and agents of the corporation (i) with the same
scope and effect as the provisions of this Section with respect to the
indemnification and advancement of expenses of Directors and officers of the
corporation; (ii) pursuant to rights granted pursuant to, or provided by, the
Washington Business Corporation Act; or (iii) otherwise consistent with law.
8.9 PERSONS SERVING OTHER ENTITIES
Any person who, while a Director, officer or employee of the
corporation, is or was serving (a) as a Director or officer of another foreign
or domestic corporation of which a majority of the shares entitled to vote in
the election of its Directors is held by the corporation or (b) as a partner,
trustee or otherwise in an executive or management capacity in a partnership,
joint venture, trust or other enterprise of which the corporation or a wholly
owned subsidiary of the corporation is a general partner or has a majority
ownership shall be deemed to be so serving at the request of the corporation
and entitled to indemnification and advancement of expenses under subsections
8.1 and 8.3 of this Section.
SECTION 9. AMENDMENTS
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by the Board, except that the Board may not repeal or amend any Bylaw
that the shareholders have expressly provided, in amending or repealing such
Bylaw, may not be amended or repealed by the Board. The shareholders may also
alter, amend and repeal these Bylaws or adopt new Bylaws. All Bylaws made by
the Board may be amended, repealed, altered or modified by the shareholders.
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EXHIBIT 10.11
[McCAW INTERNATIONAL, LTD. LETTERHEAD]
August 22, 1997
Mr. Thomas J. Truesdale
1365 Gettysberg Road
Longrove, IL 60047
Dear Tom:
This letter, when executed by both of us, will confirm our mutual understanding
of the terms and conditions applying to your employment with McCaw
International, Ltd. ("McCaw International" or the "Company"). We look forward
to your contribution to the Company as a key member of the team.
I outline below the specific terms and conditions regarding the offered
position:
<TABLE>
<S> <C>
Position: Vice President - International Operations
(Grade: EX1; Job Code: VP001)
Reporting to: Chief Executive Officer of the Company
Start Date: September 1, 1997
Location: NSC, McLean Virginia
Base Salary: $155,000 per year, paid semi-monthly
Bonus: You will be eligible to receive in cash a yearly bonus of up
to 35% (to be determined by the Board of Directors of the
Company upon the recommendation of the Chief Executive
Officer of the Company) of your annual base salary, based on
your achievement of specific objectives. The specific
objectives to be achieved in order to be eligible for a
bonus shall be mutually determined by you and the Chief
Executive Officer of the Company. Payment of the bonus is
expected to occur during the first quarter of each year and
will be prorated based on the length of time you are
employed by the Company.
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<PAGE> 2
Mr. Thomas J. Truesdale
August 22, 1997
Page 2
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Performance Review: Your performance in your position with the Company
will be reviewed on an annual basis by the Chief Executive
Officer of the Company, who shall report the results of such
review to the Board of Directors of the Company, at which
time you will be eligible for a merit increase in your base
annual compensation. Any such increase shall be based on a
positive review of your performance and commensurate with
your duties and responsibilities.
Equity: You will continue to retain your options to acquire 27,500
shares of Class A Common Stock of Nextel Communications,
Inc. ("Nextel") in accordance with the Nextel Option Plan
that you received in connection with your present employment
by Nextel. These options will vest in accordance with the
Nextel Option Plan.
You will receive options to acquire 10,000 shares of stock
of McCaw International in accordance with the McCaw
International 1997 Stock Option Plan. The options will vest
over four years on a pro-rated monthly basis commencing on
your employment.
Agreements for the Nextel stock options and the McCaw
International stock options will be forwarded to you once
the Nextel Compensation Committee and the Plan Administrator
have acted and specific terms and provisions of the plans
have been approved.
Termination: The initial term of your employment with the Company shall
be one year from the date you start. Thereafter, your
employment with McCaw International will be of indefinite
duration, terminable at will by either party, without cause.
This means that you may elect to terminate your employment
with McCaw International at any time, and McCaw
International retains the same rights. This "employment
at-will" paragraph operates notwithstanding any other
provision of this letter, and no officer or employee of
McCaw International is authorized to offer any employment
relationship other than the "at-will" relationship provided
for in this paragraph. If either party
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<PAGE> 3
Mr. Thomas J. Truesdale
August 22, 1997
Page 3
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terminates this Agreement, except for COBRA benefits and
repatriation, all rights and liabilities hereunder will
cease. You and McCaw International agree that the terms of
your employment will be governed by the laws of the State of
Washington, not by the laws of any foreign country.
Nextel Transfer Options: In the event that McCaw International is
spun-off to the public in a public offering transaction and
immediately subsequent thereto Nextel owns less than 50% of
the outstanding shares of McCaw International, you may, at
your option, transfer from McCaw International to a position
with a similar grade and salary level at Nextel.
Business Expenses: Any business expenses that you incur on behalf of
McCaw International that are directly related to your work
will be reimbursed based on properly completed
documentation, including receipts, and approvals in
accordance with applicable Company procedures.
Benefits: You will be eligible for the standard Nextel insurance and
benefit plan package, commensurate with your position and
salary, a summary of which has been provided to you
herewith; provided that you will receive 15 days of vacation
per calendar year prorated for any partial years of
employment.
Confidentiality: You will agree that at all times during your employment and
after termination of your employment you will not, without
written permission of the Company's then current Chief
Executive Officer, disclose to any party or use or permit to
be used in a manner adverse to the Company any confidential
or other proprietary information of the Company, including,
without limitation, trade secrets.
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Your duties and responsibilities will be as discussed with the Chief Executive
Officer of the Company.
Finally, you represent to us that, to the best of your knowledge, you have
never been discharged or asked to leave an employer for reasons of personal
integrity or performance.
<PAGE> 4
Mr. Thomas J. Truesdale
August 22, 1997
Page 4
We believe that you will make a valuable addition to our team and look forward
to working with you. Please do not hesitate to contact me if you have any
questions or require additional information.
Please sign below where indicated and return this letter to me at your earliest
convenience.
Sincerely,
/s/ KEITH D. GRINSTEIN
----------------------------
Keith D. Grinstein
President and CEO
I accept the offer of employment contained in this letter and hereby agree that
I have read and understand the terms contained herein.
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/s/ THOMAS J. TRUESDALE Dated: 8/26/97 , 1997
- ------------------------------- ---------------------
Thomas J. Truesdale
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<PAGE> 1
EXHIBIT 21
NEXTEL INTERNATIONAL, INC.
List of Subsidiaries
December 31, 1997
<TABLE>
<CAPTION>
COMPANY % INTEREST
<S> <C>
McCaw International (Brazil), Ltd. (Virginia) 81%
Airfone Holdings, Inc. (Delaware) 100%
Nextel S.A. (Brazil) 77%
Trunkline Telecomunicacoes e Servicos Ltda.
(Brazil) 20%(1)
Trunking do Brasil Servicos de Telecomunicacoes
Ltda. (Brazil) 20%(2)
Promobile Telecomunicacoes Ltda. (Brazil) 49%(3)
Telemobile Telecomunicacoes Ltda. (Brazil) 49%(4)
Air-fone Participacoes e Empreendimentos S/C
Ltda. (Brazil) 100%
SOW Comercio e Servicos de Radiofonia
Movel Ltda. (Brazil) 100%
Nextel Telecomunicacoes Ltda. (Brazil) 100%
Master-Tec Industria e Comercio de Produtos
Electronicos Ltda. (Brazil) 49%(5)
Via Radio Administacao e Participacoes Ltda.
Via Radio-1 Telecomunicacoes Ltda.
(Brazil) 100%
Comercial Telecar Ltda. (Brazil) 100%
Telemovel Servicos Ltda. (Brazil) 100%
ATG-Telecomunicacoes e Comercio Ltda.
(Brazil) 100%
Car-Tel Telefonia Movel S/C Ltda. (Brazil) 100%
Comercial Teleservice Ltda. (Brazil) 100%
Radio Telecomunicacoes do Brasil Ltda.
(Brazil) 100%
MSC Radio Telefonia Ltda. (Brazil) 49%(6)
</TABLE>
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(1) Butler Gorge International Corporation owns option to purchase 79% and
Telcom Ventures LLC owns option to purchase remaining 1%.
(2) Butler Gorge International Corporation owns option to purchase 79% and
Telcom Ventures LLC owns option to purchase remaining 1%.
(3) Butler Gorge International Corporation owns option to purchase
remaining 51%.
(4) Butler Gorge International Corporation owns option to purchase
remaining 51%.
(5) McCaw International (Brazil), Ltd. owns option to purchase remaining 51%.
(6) Nextel S.A. also owns option to purchase remaining 51%.
<PAGE> 2
<TABLE>
<CAPTION>
COMPANY % INTEREST
<S> <C>
LMP Consultoria e Representacoes e Representacoes Ltda. (Brazil) 49%(7)
Telecomunicacoes Brastel S/C Ltda. (Brazil) 49%(8)
Butler Gorge International Corporation (British Virgin
Islands) 100%
Art Consult International S.A. (British Virgin Islands) 100%
Nextel International (Services), Ltd. (Delaware) 100%
Nextel International (Delaware), Ltd. (Delaware) 100%
Nextel International (CanMex), Ltd. (Delaware) 100%
Comunicaciones Nextel de Mexico S.A. de C.V. (Mexico) 100%
Telecomunicaciones Globales S.A. de C.V. (Mexico) 3.0%
Clearnet Communications Inc. (Canada) 3.7%(9)
Nextel International (Holdings), Ltd. (Cayman Islands) 100%
Nextel International (Argentina) LLC (Cayman Islands) 99%(10)
Nextel International (Argentina), Ltd. (Cayman Islands) 100%
Nextel Argentina S.R.L. (Argentina) 100%
Nextel International Indonesia LLC (Cayman Islands) 99%(11)
Nextel International (Peru) LLC (Cayman Islands) 99%(12)
Valorcom S.A (Peru) 70.05%
Nextel International (Philippines) LLC (Cayman Islands) 99%(13)
Top Mega Enterprises, Ltd. 100%
Infocom Communications Network,
Inc. (Philippines) 30%
Nextel International Investment Company (Delaware) 100%
Shanghai CCT - McCaw Telecommunications System Co., Ltd.
(Shanghai) 30%
</TABLE>
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(7) McCaw International (Brazil), Ltd. owns option to purchase remaining 51%.
(8) McCaw International (Brazil), Ltd. owns option to purchase remaining 51%.
(9) As of March 12, 1998, Nextel International, Inc. also holds an addditional
16.33% of Clearnet Communications Inc.
(10) Remaining 1% owned by Nextel International (Delaware), Ltd.
(11) Remaining 1% owned by Nextel International (Delaware), Ltd.
(12) Remaining 1% owned by Nextel International (Delaware), Ltd.
(13) Remaining 1% owned by Nextel International (Delaware), Ltd.
